Household Formation Growth Poised to Slow Significantly

Article originally posted on Globe St. on July 18, 2023

After three powerful years of household formation growth ending last year, Harvard University’s The State of the Nation’s Housing report says growth will likely slow. The report has seen it most prominently in professionally managed apartments, thanks in part to rising rents and the increased number of households with higher incomes transitioning to homeownership.

“Much of the pent-up demand for household formation among young adults has been released, and also because of deteriorating affordability and slowing population growth, the primary long-term driver of household growth,” Harvard said.

Immigration could help to pick up the slack created by deaths among the oldest baby boomers. This cohort’s death rate will eventually exceed that of births. However, Harvard said, “immigration is much less predictable” compared to natural growth.

That natural growth (1.9 million per year in 2019–2022) was fueled by the pandemic-induced need for space, the pause in federal student loan payments, various stimulus packages, the temporary decline in rents in many major cities, and a boost in savings.

“Against this backdrop, millions of millennials in their 20s and 30s were able to form new households and financially distressed households were able to remain in their homes,” the report said.

Younger households then were able to take advantage of lower interest rates to claim homeownership.

The homeownership rate rose by 1.2 percentage points overall since 2019 but by 2.2 percentage points among households under age 35 and by 2.1 percentage points for households ages 35 and 44.

Consequently, the number of homeowner households by an adult under age 45 grew by 10 percent in just three years between 2019 and 2022.

Allan Swaringen, President and CEO of JLL Income Property Trust, tells GlobeSt.com the US is millions of houses and apartment units short of where it needs to be, despite a recent uptick in development.

“This has been caused by a significant slow-down in new residential development since of Global Financial Crisis,” Swaringen said.

“There remain significant tailwinds driving attractive long-term investment in the residential sector – for us, principally apartments and single-family rentals – including the growing desire of Millennials to move to the suburbs as they look for more space, a lack of affordability in homes for sale driven by Baby Boomers staying in their homes longer and elevated interest rates, and a dearth of available homes for sale.