What’s Causing the Slowdown in Household Formation?

The formation of new households in the U.S. were disappointing to say the least for the final quarter of 2015, but Capital Economics says that this news is no reason to panic.

The U.S. Census Bureau recently reported in their Housing Vacancies and Homeownership survey (HVS) that household formation rose by 462,000 year-over-year for the fourth quarter of 2015. This was the smallest increase on record since the second quarter of 2010. The Capital Economics analysis says that the low fourth quarter rate of household formation "reflects base effects" and household estimates are "very volatile."

Capital Economics believes that housing demand will trump supply troubles and encourage homebuilders to meet buyers' needs and boost home prices.

"The sharp slowdown in household formation in the final quarter of 2015 reflected base effects, and is not a cause for concern," the report stated. "In any event, even though a lack of available homes will act as a constraint on the creation of households, underlying demand from Americans wishing to set up on their own will hold up. That will give homebuilders the confidence to increase production, as well as put upwards pressure on house prices."

The report found that households numbers should have come in higher due to the share of 18 to 34 year olds living with their parents—31.5 percent in 2015 and 27.5 percent before the financial crisis.

"Many of those will be itching to move out of the parental home and form their own households," Capital Economics said. "The improvement in the labor market will help some of them to do so–after all it is hard to strike out on your own if you do not have a job. And banks are gradually loosening their lending criteria, giving more Americans the opportunity to buy a home."

But no matter how many consumers want to form their own households, supply remains an issue.

"These arguments can get rather circular–household formation is needed to sustain housing demand, but a lack of homes can weigh on the formation of those households, Capital Economics stated. "But the key point to note is that if a slowdown in household formation is due to a lack of homes on the market, rather than an unwillingness/inability of people to strike out on their own, that shouldn’t impact on builders willingness to up production. It also means house prices will continue to come under upwards pressure. In other words, while household formation is likely be steady rather than rapid over the next couple of years, that is not a reason to believe that the recovery in homebuilding is set to tail off."

Click here to view the full report.