Monday, November 12, 2012

Some thoughts on household formation

An interesting article was published in the NY Times today entitled "Bundled Households". It discusses the fact that the younger generations live with their parents/relatives in larger numbers than in the past. Here are a few comments on the topic of household formation.

1. This trend is by no means new - see discussion.

2. The article points out that household formation has been slower than in a more "normal economy".
NYTimes: - Based on demographics and previous trends in household formation, it looks as if the country still has about 1.8 million fewer households today than it would have in a more “normal” economy, and most of that total household deficit is accounted for by the lower numbers of households formed by those in the 15-34 age group. Demographics suggest that there should be about 1.1 million more households headed by younger Americans today than there actually are.
What came before the the financial crisis (the "previous trends in household formation") was not particularly "normal", and making comparisons to that period is not always meaningful. The NY Times chart below is quite informative, but the blue and yellow component is likely the "new normal". Even as household formation improves, the increased number of young people living with their parents and larger households in general are here to stay - this is not necessarily some sort of a deviation.

Source: The New York Times

3. Clearly the sharp declines in household formation were driven by the economy. In time however households will resume forming at some "natural" pace which is linked to population growth. That "natural" pace is not necessarily the same as it was prior to the recession, but is likely higher than it has been recently. Economic conditions can work to delay household formation but can not stop it altogether, unless the US population growth slows. And we have no evidence of that so far.

US Resident Population (source: U.S. Census Bureau, Population Division)

To put it simply, in spite of households being bigger in the "new normal", there is a physical limit to how many more people can be packed into a single household. Of course more of the newly formed households are renters (see discussion) and many new households are simply several roommates living together (not necessarily based on family formation).

4. As discussed earlier (see this post), 2012 actually saw a sharp increase in household formation. We may be moving toward that "natural" trend, driven by population growth. Some attribute this to the improvement in the labor markets. Perhaps.

Source: Merrill Lynch
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