Young Adults Still Living With Parents Messing Up New Household Projections

The new head of the Federal Reserve, Janet Yellen, recently had some chilling worlds for the housing business, complaining about very slow rates of new household formation. “We …

The new head of the Federal Reserve, Janet Yellen, recently had some chilling worlds for the housing business, complaining about very slow rates of new household formation.

“We need to see some pick-up in household formation in order to see continued recovery in the housing market,” said Yellen in testimony before Congress on May 7. That’s concerning news for the apartment business. Developers are going to need lots of new households to form up to fill all the new apartments that they are now building.

But don’t panic yet. Apartment experts say that job growth—and yes, household formation—continues to strengthen in most of the places where developers have new apartment buildings under construction. They stand by their projections that overall household formation will ramp up in the near future and they say demand for apartment should keep up with supply in most markets over the coming year.

Let’s start with the bad news. According to census data, the estimated number of households in the U.S. barely budged over the last year, rising about 200,000 to reach 114.63 million in March. Many experts seem to have expected a much stronger increase. Yellen blamed the slow growth on many young people who still live at home with their parents. And she hedges on how many of those young people are ever actually going to move out of their basements.

“My expectation is that as the job market strengthens and the economy strengthens, we’ll see household formation pick up. But it’s hard to know here exactly what the new normal is,” Yellen said in her testimony.

Claim up to $26,000 per W2 Employee

  • Billions of dollars in funding available
  • Funds are available to U.S. Businesses NOW
  • This is not a loan. These tax credits do not need to be repaid
The ERC Program is currently open, but has been amended in the past. We recommend you claim yours before anything changes.

Multifamily experts are more optimistic. They call these young people “pent up demand” for housing that will eventually create 3.0 to 3.5 million new households. That should help grow the rate of new household formation to 1.2 to 1.4 million a year for the next several years, according to Marcus & Millichap.

Also, not all areas are created equal for household formation. The Census data may be slow overall—but it’s more positive in the top 82 metropolitan areas tracked by Reis. New households have been forming up more and more quickly in these areas throughout the recovery. The number of households in these 82 metro areas grew 0.8 percent in 2011, 0.9 percent in 2012 and 1.0 percent in 2013, according to Reis.

This year the number of households in these metro areas should grow 1.2 percent—that’s  the same fast rate growth these areas averaged back in the boom years from 2005 through 2007. “We are working our way back to prerecession levels,” says Ryan Severino, Senior Economist. Reis, Inc.

The difference between the weak national numbers that Yellen complained about in her Congressional testimony and the stronger local numbers could represent people moving from rural areas to the 82 top metro areas tracked by Reis. That movement would not increase the overall number of household in the U.S., but it would pump up the number of households in cities where the best job opportunities are.

“A lot of the job formation has been in the inner cities and urban core,” says Mitchell W. Kiffe, co-head of national production for the debt and equity finance for CBRE Capital Markets.

Developers have reason to anxiously watch the numbers, because they will depend on new household to fill the new apartments they are building. The number of new units delivered in 2013 increased 84 percent over the prior year to 168,000. Another 215,000 units will come on line in 2014, according to Marcus & Millichap, which expects a slight increase in the national vacancy rate of 20 basis points to 5.1 percent by the end of the year.

Fortunately, nearly all of these new units are concentrated in the metro areas where new households seem to be forming. “The supply is coming online where there is strong demand,” says Kiffe.

This article was republished with permission from National Real Estate Investor.


Does Your Small Business Qualify?

Claim Up to $26K Per Employee

Don't Wait. Program Expires Soon.

Click Here

Share This:

In this article