A hallmark of the Great Recession and its aftermath was the decline in U.S. household formation.
Since 2009, household formation was below long-run trends as job loss, lack of employment opportunities, and tough credit conditions saw young adults moving back in with their parents or just never moving out.
All of this has been hindering demand for new and existing homes.
But that trend is starting to change.
The improving labour market is helping U.S. household formation among young adults, according to Michael Gapen at Barclays.
The employment-to-population ratio for 16-24 year olds has climbed to 47.7% in May, from an average of 46.5% in 2013.
“While we are sceptical that our macro outlook will be sufficiently strong to fully reverse the softer trend rate of household formation given the tighter post-recession credit environment, recent data do suggest that household formation among young adults is improving,” writes Gapen.
“In particular, data from the Current Population Survey, which includes extensive information on both the number and characteristics of US households over time, suggest that more young adults are now finding it feasible to move out.”
While the employment-to-population ratio for those in the 25-34 bracket has also ticked up, they are already less likely to live at home with their parents. “Only 18.8% and 8.9% of 25-29 year olds and 30-34 year olds, respectively, live with parents,” writes Gapen.
55.3% of 18-24 year olds lived at home in 2013, compared with 56.2% in 2012. Since there were estimated to be 30 million 18-24 year olds in the U.S. last year, according to Current Population Survey estimates, the one percentage point decline suggests that 300,000 young adults were looking to move out.
The crucial thing to note however is that only 20% of young adults under the age of 25 are heads of households and homeowners. In other words, they are more likely to rent. So the rebound in household formation among young adults is likely to reinforce an existing trend: a strong rebound in multi-family starts, stemming from rental demand.
“New household formation that is driven by young adults is likely to support rental demand and multi-family start activity,” writes Gapen. “From there, stronger labour markets and time may move households from renter to owner status.”
This of course is important, because as the housing market continues to recover, fewer households are driving rental demand as “support from the foreclosure pipeline is expected to fade.”
Gapen expects 1.16 million housing starts in Q4 2014 and 1.35 million in Q4 2015.