Our forecast of rising new-home demand is founded on a reversion to long-standing typical behavior patterns.
One of these relates to the “doubling-up” of households during and after the recession. We are seeing some evidence that young people who had moved in with their parents or relatives are now finding the means and the motivation to move out and get their own place.
The Current Population Survey for 2013 showed a drop in the percentage of twenty-somethings living with parents. This was the first decline since 2005, back when the speculative foundations of the housing market started to crumble. The decline may seem tiny when you look only at the percentages: the percentage of people in the group aged 18 to 24 living with parents or a related subgroup fell from 56 percent to 55 percent in one year. One should bear in mind that the magnitudes associated with these percentages are huge. The one-percentage-point decline amounts to 300,000 people who are now looking for a place of their own who were previously living in their parents’ house.
More improvement can be expected. A recent study by the Harvard Joint Center on Housing shows that last year 2.1 million more people between in their 20's lived with their parents than would have typically been the case based on normal headship rates. As these people– not to mention the 300,000 people in their 30's living at ‘home’– leave the nest, often for the second time, there will be more demand for housing. The Harvard study concludes that 2.7 million more households will form among people in their 30's over the next decade.
First-time buyers are expected to become a larger part of the housing market over the next several years. First-time home buyers typically comprise 40 percent of home buyers (long-term average), and during this stage of a housing recovery, the percentage would normally be 45 percent or higher. Lately, their share has been in the 35 percent to 38 percent range.
The return to normal percentages as described above will help drive household formation rates back to normal levels. Household formation rates typically average 1.4 million per year, but lately they have been running half this rate, or less (500,000 to 700,000). During economic recoveries like this one, a rate closer to 1.7 million would be expected. Even with mortgage-qualification issues and student loan debt, a very significant increase in new households in the years ahead is a sure thing.
The troubling question remains: how many of these will be new-home buyers? High student loan balances will continue to make mortgage qualification difficult for many, and high land prices keep many builders from catering to this group’s needs. These will continue to be impediments, despite some recent legislative help with student loans.
What is the net result? While most of these newly-emerging twenty-somethings will be going into rentals, the movement out of the parental home is nonetheless expected to support a series of positive steps from rentals to entry-level re-sales to entry-level new homes, and on up the ladder. It is conceivable that household formation rates will stay below normal levels as a result of the qualification challenges and other issues, but even at lower-than-normal rates, and lower rates of home ownership, there will be a meaningful increase in new home demand for each of the next few years.