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Conditions are Ripe for Household Formation

Tuesday, July 16, 2013 10:27 AM | Anonymous
By: Housingwire

A sharply positive turn in U.S. household formation has caused a rising demand for all types of housing over the last two years, including multifamily and single-family rental and ownership, according to data from a number of analysts.

"We believe steady, if unremarkable, monthly job growth is creating a similar household formation environment for 2013 which should support our positive housing outlook," the analysts said in a report on housing demand.

"You’re just seeing a lot more people getting reengaged," said Sterne Agee analyst Jay McCanless. "Housing demand, whether its rental or ownership, is a positive indicator," he added. 

The research note claims conditions are ripe for household formations undefined children moving out of their parents’ home or a college graduate renting their first apartment. They added that job growth is the primary driver for household formation and that the steady job growth of the past three years has created a fertile backdrop for new household formation. 

Additionally, they noted that household formation has rebounded since it bottomed in 2009 and 2010. In these two years, household formation dipped to the mid-to-high 300k range compared to a 65-year average of 1.2 million. 

With annual household growth of 1.1 million and 2.4 million in 2011 and 2012, respectively, we believe there will be a consequential increase in the level of housing demand. 

For more than two years, housing permits, housing starts, resales and new single-family sales have been on the rise. "Assuming job growth remains at or above the current pace," write the analysts, "we expect these trends to continue."

Multifamily has exhibited higher growth rates than single-family thus far in the upturn, as HousingWire reported at the beginning of the month.

"We’ve seen multifamily permit growth outstrip single-family permit growth," said McCanless. 

The analysts note that they expect this trend to shift as the cycle progress, but it has not happened quite yet. 

For the past three years, job growth, especially in the private sector, has been chugging along. 

"That’s a very important point that tends to get lost in the shuffle undefined private employers have continued to hire and grow their businesses," said McCanless. 

"We believe two sub-indicators in the monthly nonfarm payrolls report are worth monitoring," the report reads. 

First, the analysts noted, the U-15/A-6 index measures the percentage of unemployed workers, the percentage of people working part-time that would like to be working full time and the percentage of eligible workers out of work for more than 12 months. 

Secondly, the analysts monitor the progress of monthly nonfarm private job creation. "Both indicators have been trending positively since 2010, and as a result, we believe future growth in household formations and housing demand are likely," the report said. 

McCanless sees housing starts remaining positive at least through 2015.

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