Market Improvement Is All About Household Formation

Market Improvement Is All About Household Formation

It seems at times that it’s an either-or situation when it comes to a healthy housing market with rising home prices and a healthy rental investor market. It really isn’t, but investors have certainly been thrilled lately with the movement of the millennial generation away from buying and toward living with their parents or renting. There’s room for everyone, buyers and renters, but right now it’s still largely a rental society.
This week at USNews.com there is an article about how the younger generations are spending and saving carefully, and they do as a group really want to own a home one day. A young lady living with her parents shares here financial situation, with $330/month in student loan payments, as well as her car payments and transportation expenses. She definitely wants to own a home at some point, but has no idea when that will be.
Today’s college graduates are sharing domiciles and cars, delaying marriage, and they’re certainly not buying homes. From a positive perspective, today’s younger generations are struggling to create better financial flexibility while dealing with fewer jobs at lower wages. However, they are placing more value on liquidity, savings for emergencies, and paying down debt for a better future.
New households form as individuals move out from homes of family and friends and occupy a separate rented or owned residence. The “doubling up” of young adults living with their parents is definitely not helping. From 2002 through 2005, around 1.4 million new households were formed annually. Since 2009, that number has fallen to less than half, around 600,000 new households each year. Analysts are particularly disturbed that in recent years almost all of the growth in new households has been renter households.
In the long run, population growth will have a significant impact on housing demand. If young adults are staying with their parents and putting off marriage and children, it’s another negative for household formation. The good news for investors is that new household formation, at least until there’s a major improvement in the economy and jobs, will almost exclusively be through rental housing.

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