2014 Household Formation Rebounds

Financial FAQs

Breaking news. The latest Homeownership & Vacancy Survey, released by the Census Bureau, estimated household formation surged to 1.7 million in 2014 from 400,000 the previous year. That is really big news. Household formation, which is the bottom line demand factor for RE sales, mortgage financing, as well as the insurance and construction industries—in fact, anything related to the housing market--may finally begin to show growth from the horrible post-Great Recession years.

Graph: Trading Economics

This graph tells the story. Projections were for a recovery to 800,000 new households in 2014, but it looks like Millennials are beginning to leave home, or even college, and form new households in greater numbers—especially the oldest ages from 30 to 36 years. And most demographers agree millennials were born between 1980 to 1996, which means the oldest are reaching the age when they want to start a family, and that usually means buying a home.

Many of those have been renting, and we actually saw a 2.1 million surge in rental units in 2014, which has to account for many of those new households, according to the Census Bureau survey.

In fact, over the past year all the growth in net household formations has been among renters, according to the U.S. Census. For those 35 years old and younger, their home ownership rate has fallen from 44 percent to 36 percent over the past decade, which is why construction of multi-family apartments is at the highest level in a quarter-century this year.

And we know why. They can’t afford to buy until they reach an older age—in fact 30 years of age is when they achieve the median income wage of $42,000, according to a new Georgetown University study.

Through analyzing about three decades of census data—from 1980 to 2012—the study found that on average, young workers are now 30 years old when they first earn a median-wage income of about $42,000, a marker of financial independence, up from 26 years old in 1980.

Graph: fivethirtyeight.com

Economists now estimate millennials will spend some $1.6 trillion on home purchases and $600 billion on rent over the next five years, more per person than any other generation with more of them opting for more affordable rents versus paying the big price tags to buy homes, according to a new report from The Demand Institute, a non-profit think tank operated by The Conference Board and Nielsen. Millennials will form just over eight million new households, albeit most of them rental households, as we said.

But there is some good income news. The 2014 numbers aren’t in for a breakdown in median incomes, but the Q4 2014 Federal Reserve Flow of Funds report says the net worth of households and nonprofits rose to $82.9 trillion during the fourth quarter of 2014. The value of directly and indirectly held corporate equities increased $742 billion and the value of real estate rose $356 billion.

This can only boost the millennial generation’s financial well-being, as well, and so the housing market and its ancillary industries.

Harlan Green © 2015

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Rental Markets Strongest in Q1

The Mortgage Corner

After hitting bottom in 2010, Reis Reports, a leading rental property analyst, reported in Q1, “After five quarters of improvement, it is apparent that we are in the midst of a recovery in the office sector”, said the report. “National asking and effective rent growth improved slightly in the first quarter, continuing the slow upward trend that began in the first quarter of 2011. Annual gains of 1.6 and 2.1 percent, respectively, also indicate a moderate pace of improvement, but are unimpressive.”

The sector continues to be hampered by the anemic pace of improvement in the labor market. There is certainly positive churn in leasing, but rents remain at levels last seen in 2007, and five-year leases coming due in 2012 run the risk of being signed at equivalent or lower rent levels, exerting a dilutive effect on landlord incomes.”

Office Effective Rent Growth

Graph: Reis Reports

Apartment Vacancy and Rent

Apartment leasing was more favorable, with the national vacancy rate now below 5 percent. Activity showed little signs of slowing during the first quarter, partly because of the relatively mild winter in the Northeast, said Reis. Net absorption, or the net change in occupied stock, remains strong with 36,488 units leasing up. Tight supply conditions with only 7,342 apartment units coming online in the first quarter are helping the performance of apartment properties around the nation. National asking and effective rents remain strong, with effective rents (asking rents net of concessions) increasing at its fastest rate since end-2007. Asking rents grew by 0.5 percent and effective increased by 0.9 percent in the first quarter. Reis expects effective rent growth to accelerate even more as vacancies tighten within the 4 percent band; with availability so scarce, landlords have little incentive to concessions.

Graph: Reis Reports

Neighborhood and Community Shopping Center Effective Rent Growth

Asking and effective rents both increased by 0.1 percent, in line with the changes from the fourth quarter of 2011. This is the second consecutive quarter of rent increases and another cautiously optimistic sign for neighborhood and community centers. Additionally, relative to the first quarter of 2011, both asking and effective rents grew 0.2 percent. This represents a slight acceleration versus the fourth quarter when year-over-year asking and effective rents were either unchanged or marginally negative. These data points offer more, but still insufficient, evidence of a nascent recovery.

But, “We remain cautious about pronouncing a turnaround until we observe a couple more quarters of improvement,” said Reis. “As we have observed in the recent past, two consecutive quarters of improvement are not necessarily the beginning of a trend and are insufficient to declare that a recovery is underway.”

Graph: Reis Reports

So it seems apartment leasing and construction is leading the real estate recovery, as builders are still reluctant to start much new single family construction. Econoday reports that optimism continues for the apartment industry, according to the latest results of the National Multi Housing Council (NMHC) Quarterly Survey of Apartment Market Conditions. The findings reflect a gradual recovery for the multifamily sector that faced a 50-year low in apartment starts in 2009.

Graph: Econoday

"Market conditions improved across the board, even from the rather strong level of three months ago,” said NMHC Chief Economist Mark Obrinsky. “Demand for apartment residences – and apartment properties – continues to grow. We anticipate this increasing further in the coming years due in part to the large number of younger households moving into the housing market and a greater preference shown for renting.”

The Market Tightness Index increased to 74 from 60. Nearly half (49 percent) reported tighter markets – reflecting lower vacancy rates and/or higher rents – compared to only one percent reporting looser markets.

Harlan Green © 2012