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MARKET ANALYSIS: March 2015

In 2013, the population for over 65 surged as the front end of the baby boom turned 65 while the headship rate was unchanged. HHF for the over-55 age group was near 1 million. Population grew nearly 4 million for the younger groups (age less than 35) between 2007-13, but there was effectively no growth in households.

Part of the reason was the decline in employment. The employment rate for younger adults fell sharply during the recession. But there is more going on. The employment rate for the younger adults bottomed in 2010 and was recovering in 2011-13 and did not stabilize headship rates.

A variety of other factors have emerged that contribute to the decline. For instance, the lack of wage growth, growth in part-time jobs vs. full-time jobs, curtailment or reduction in benefits, such as health care insurance, are making it more difficult for younger adults to afford heading their own households.

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Finally, there is clear evidence the real income for younger adults in the 25-34 age group has not done too well. In fact, real income for younger adults, including college graduates has been declining since 2002. The same factors that have inhibited household formations contributed to a decline in the homeownership rate for younger families. Briefly, let’s look at the strong growth in HHF for the over 55 age groups. HHF for the over 55 age groups continue to grow in line with the population growth.

So, What Is Next? Are HHF Ready to Accelerate in 2015-16?
Yes! We still believe the strong economic growth forecast for 2015-16 will translate into higher employment and improving wages for the under 40 age groups. Headship rates should stabilize and improve modestly (releasing some of that pent-up demand). If so, the household formations will move up sharply over the next few years. A preliminary estimate for 2015-17 suggests household formations will approach 1.4 million per year by 2016. As mentioned earlier, most of the growth will be in the over 55 age groups. But rather than pulling the overall average down, we should see
HHF growth in the younger age groups as well. HHF for the under 40 age groups should move into the 300,000-500,000 per year rate rather than the declines seen in 2007-13.

Bottom Line
Our earlier hopes for a turnaround in household formations proved optimistic, in part because the employment growth has not translated into the type of income growth we have seen historically for young adults. We remain confident, however, that the end of the dismal rebound is near. The most recent release on occupied housing suggests that HHF are accelerating. With the inventory correction largely done, a rebound in HHF to the 1.2-1.4 million range is consistent with our recent view that housing starts eventually get to 1.7-1.8 million per year.

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This article was excerpted with permission from FEA ’s “Spotlight.” To learn more, visit www.getfea.com.

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