Posted by: Josh Lehner | October 10, 2019

Is Household Formation Strong or Weak?

Overall the number of households in the state continues to increase. This is no surprise given that we are a magnet state. In good times and bad people pack up and move to this part of the world, especially when job opportunities are plentiful. Given migration flows in recent years have been about as large as we have seen in absolute terms (not true in percentage terms), it makes sense that the number of new households are increasing quickly as well.

The latest Census data shows Oregon added just over 36,000 new households last year, the highest we have seen in the ACS data. These increases are now catching up to the household formation rates seen in the more timely, but more volatile household survey (CPS). The growing gap between the two different data sets was an issue to watch, however that gap is closing some and does not represent a true problem.

A few things. One, people follow the jobs and as employment growth slows, so too will migration. This is already happening and the most recent CPS data shows household formation across the state is slowing some as a result. Two, while Census pegs the number of new households at 36,000 last year, we know we built just under 20,000 new housing units. This continues to place upward pressure on housing costs overall. Three, see our previous post on the housing starts outlook for more on the better balance our office expects in the coming few years.

While the total number of new households in recent years has been about as big as we have seen, it doesn’t necessarily mean that household formation is strong. In fact, if we dig into the types of households and who is forming them, we see that within the existing population, household formation is actually pretty weak.

Specifically, the headship rate among 20- and 30-somethings continues to drop. Young adults are living at home longer, or living with roommates to a larger degree than a decade ago, let alone two decades ago. Within the Portland region this decline means there are nearly 28,000 fewer households today among the 25-44 year age group than there would be if household formation rates were the same as back in the mid-2000s. Across all age groups, the decline in household formation rates in the Portland region results in 36,000 fewer households on net. This is equal to 3 years of new construction, which is a massive number.

Now, this issue isn’t new nor is it specific to Portland or any other particular region. Len Kiefer, deputy chief economist at Freddie Mac — a great follow on Twitter BTW — put together a report last year on the factors behind this decline in household formation. In short, it’s a number of things like higher housing costs and worse economic outcomes for Millennials who graduated into the Great Recession. However other shifts like the delay in marriage and having kids also play a role as well. And not all factors result in lower rates. For example, higher levels of educational attainment actually point toward more households than would otherwise be expected, as such individuals have higher employment rates and incomes and the like.

Bottom Line: The number of households in Oregon continues to increase. These gains are entirely driven by population growth and the age structure. Within age groups, household formation rates are quite weak for a variety of reasons, including housing costs and economic outcomes. Now, given the strong multifamily construction in recent years, and concerns about overbuilding, these lower rates of household formation among 20- and 30-somethings may actually represent a form of latent demand. As affordability improves via both slower rent increases and rising incomes, a revival of or even just a moderation in the decline in household formation rates could help with both near-term and longer-term absorption of the new apartments. To the extent this occurs, the market may find a new equilibrium sooner rather than later. And it would put upward pressure on the need for higher levels of construction activity to meet the demands of the growing population.


Responses

  1. […] Josh Lehner — Is Household Formation Strong or Weak? […]

  2. […] Source: Is Household Formation Strong or Weak? | Oregon Office of Economic Analysis […]

  3. Thanks for addressing this important topic. One key addition to Kiefer’s work that you cite would be to recognize that marriage and fertility rates are not somehow given, but very affected by economic circumstances and policies. A New York Times poll last year found the cost of child care to be the single most important reason US couples weren’t having as many kids as they’d like, with, other economic issues being the 3rd, 4th and 5th most important reasons (https://www.nytimes.com/2018/07/05/upshot/americans-are-having-fewer-babies-they-told-us-why.html). A 2017 article on “The Economic Consequences of Family Policies,” shows that national spending on early child care and education have a strong impact on fertility. (https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.31.1.205) If people can’t afford to have kids, they’re less likely to marry and form separate households.

    • Thanks Mary. You’re absolutely right. The economic outcomes enter into a lot of different decisions so the direct and indirect impacts add up. Now decomposing that would be a great research project! Beyond the survey results I mean.


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