Household-Formation Numbers Are Back to Recession-Era Levels
According to the Census Bureau, household formation in 2017 fell to the lowest levels seen since 2010. In 2017, total households in the United States grew 0.32 percent, which was only slightly above the historic low of 0.30 in 2010, in the wake of the 2008 financial crisis.
Of course, differences of one-hundredth of a percent don't have much meaning in statistics like these, so we can say, generally speaking, that household formation fell to recession-type levels in 2017. No other period since the Great Depression has shown household formation levels below those found in 2017, and in 2009-2010.
In looking at trends, household formation can be a useful number because new households often accelerate during times of economic boom, and contract in times of bust.
Given that we're currently in a boom period, we'd expect to see fairly sizable growth in household formation. This is because, during boom periods, growing income allows people to move out form housing they had previously been forced — by economic necessity — to share with parents, extended family, or roommates.
For this reason, some observers have expressed concern that the weak household formation numbers. As CNBC reported in 2017:
The rate of household formations growth has declined significantly this year, and some say this could have negative implications for the broader economy.
According to a new report from Torsten Slok, chief international economist at Deutsche Bank, the substantial slowing in household formation growth this year comes after years of rather fairly steady growth after the financial crisis.
In 2016, Marketwatch had voiced similar concerns, but Marketwatch also attributed the low household formation rates to millennials waiting longer to strike out on their own. Not to worry, Marketwatch concluded, the household formation rate was "about the explode." But, in 2017 household formation went in the opposite direction, and most certainly did not "explode."
So why do millennials continue to hold back on household formation, even while the overall economic numbers are so good? After all, unemployment rates are at multi-decade lows, and median household income has finally surpassed old peak levels.
More from CNBC:
The culprit may come down to declining housing affordability, [Slok] said, which is the "No. 1 suspect" for the lack of household formation (defined as becoming the head of a household rather than forming a family and still living with parents or an older generation) amid relatively healthy job growth and payroll figures.
"This, of course, is a real worry, because house prices have gone up a lot; they are back to the same level as where they were in 2006. And this trend of housing still being relatively unaffordable, which has been now for the last year or two, is somewhat problematic because it means that we can't get people out ... we can't get younger generations out and find homes. Therefore, if they are stuck together, or with their parents, then we have a problem that affordability has slowed down," he said.
Economists had expected more:
...Indeed, the slowdown in household formation over the past two years has "caught economists off guard because the improving housing and unemployment backdrop pointed in the opposite direction," said Jeremy Lawson, chief economist at Aberdeen Standard Investments.
There is no doubt that housing prices have gone up considerably — to the point of outpacing income.
The Case-Shiller index of home prices, for example, increased 25 percent from 2009 to 2016. Numbers vary considerably, of course, from place to place, but looking at this analysis of home price growth from 2012 to 2017, we find growth in most states ranges from 20 percent to over 50 percent. Growth numbers would be even larger if we extend the period back to 2009.
Nor is housing-cost growth limited to owner-occupant situations. According to the Bureau of Labor Statistics, the CPI's index of "rent on primary residence" increased 19 percent from 2009 to 2016.
By contrast, personal median income has increased by far less. Overall, median income increased 6.3 percent from 2009 to 2016, for people age 15 and older.
Moreover, income growth in recent years has been concentrated among older income earners. During the same period of 2009 to 2016, income growth was 9.1 percent for earners 65 and over. For workers in the 25-34 age range, growth was only 6.0 percent.
This is important because people aged 25-34 are in the key demographic for household formation. If 30-year olds aren't experiencing an income that's keeping up with rent growth, how are they to be expected to form more households?
Source: BLS: Table P-8. Age--People, All Races, by Median Income and Sex: 1947 to 2016
This is compounded by the fact that there's little benefit to rising home prices when you're a first-time home buyer. Yes, rising home prices can be a good thing when one already owns real estate and can sell one home in order to help afford another home. This is especially true for older homeowners who are interested in downsizing or relocating to less expensive parts of the country as they retire. For first time homebuyers, however — many of whom fall in that 24-34-year-old category — high home prices just mean one thing: expensive housing.
So, Slok is probably on to something when he suspects that housing costs are a problem when it comes to new household formation.
Household Formation Doesn't Drive Economic Growth
We should note, however, that Slok has it backward when he says that in order to generate economic growth, "we need to see household formation pick up again, we need to see people go out and buy homes."
Contrary to Slok, household formation reflects prosperity and growth in an economy, it does not generate it.
Indeed, it would not be a negative thing at all for the economy if young people were putting off new household formation in order to save more money and invest it. That is, if people were taking on roommates or extended family in order to build up a savings nest egg, that would be good news for wealth creation. But, there's not much evidence that savings are increasing. Thus, the current increase in people living with their parents or roommates longer does not point toward a booming economy. On the contrary, when we see that incomes are not keeping up with rents and home prices — especially in key demographics — then we have reason to believe that a lack of new household formation does indeed reflect worsening fundamentals in the economy.
However, when economists speak in terms of increasing homebuying as a driver of economic growth, they are falling into the usual trap of assuming that more spending generates economic growth. This is especially dangerous in terms of policymaking since a proposed "solution" to insufficient amounts of homebuying is often to lower interest rates or increase subsidies for potential homeowners.
However, as we've seen in recent years, many years of central-bank and federal-agency meddling in financial and housing markets can't be shown as something that has actually made housing more affordable for many. Homeownership rates have fallen, prices continue to rise steadily, and there is little new housing construction to bring new units online and bring prices down.
It's all just a reminder that real overall income growth depends on increasing purchasing power for more than a few slices of the population.
It's true that many of the official stats point to a growing economy and a growing standard of living. But if that becomes harder to believe when, in practice, many 30-year-olds have concluded they just can't afford to strike out on their own.