A recent study by the Research Institute for Housing America shows that as a result of the current recession, rental household formation likely fell by two to four percentage points and owner household formation likely fell by one percentage point. The study also shows the formation of native-born households dropped by three percentage points in 80 of the largest metropolitan areas between 2005 and 2008. The loss translates to a reduction of 1.2 million households nationwide, even though these metropolitan areas grew by 3.4 million people in the same time period.
Household formation occurs when a group of people who had been living together decide to establish separate households. The most common causes of household formation are children moving out of their parents’ homes, couples separating, or unrelated individuals who had been sharing a residence deciding to live on their own. Household formation may decline during a recession when children decide to delay their entry into the housing market, or when individuals or families choose to live together, rather than separately, for economic reasons. These decisions can cause overcrowding, reduce mobility, and increase vacancy rates, all which pose concerns for public policy and the housing industry.
The study finds that declines in employment cause the greatest suppression in the formation of new households, especially rental households. According to the study, the likelihood that an individual will choose to form a new household is up to ten percentage points lower if he or she is unemployed. Individuals deciding to remain with parents or roommates rather than creating their own household affects the rental market more than the ownership market, the study concludes. This is evidenced by both the reduction in overall headship rates and by the only slight reduction in homeownership rates in metropolitan areas from 2005 to 2008. Headship is measured as the ratio of households to population, essentially a measure of how many roofs the country’s population is living under.
The study uses data from the Panel Study of Income Dynamics (PSID) to determine the different economic and demographic factors that encourage or discourage new household formation, and then simulates the effects of the current recession on household formation rates. The authors then use the American Community Survey (ACS) from 2005-2008 to compare 80 metropolitan areas with respect to rates of mobility, overcrowding, homeownership, and household formation.
The report can be found here: http://www.housingamerica. org/RIHA/Publications/72429_9821_Research_RIHA_ Household_Report.pdf