Research desk explains: How do housing starts and household formation rates relate?

By Dylan Matthews

bharshaw asks:

How does the rate of household creation relate to the rate of new housing construction?

During recessions, the household formation rate generally falls. Renters squeeze more people into the same units, young adults either stay with or move back in with their parents, and so forth. This has happened during the most recent downturn, and even before the crash. Gary Painter, a professor at USC, estimates (PDF) that the number of U.S. households fell by 1.2 million from 2005 to 2008.

The comparison of the household formation rate and the number of housing units being constructed indicates how many excess units are being built, or how big a shortage is, if one exists. During the financial crisis, a large number of excess units were constructed, and with both housing starts and household formation falling, this is being corrected to some degree, (data courtesy of the Census Bureau):

However, while some correction is going on, it is not sufficient to help the housing sector recover. Household formation has fallen far enough that excess housing built during the bubble is not being filled, which means there is little demand for new housing construction, which is hurting the homebuilding sector. This creates a Catch 22 of sorts. As Calculated Risk writes, housing construction often helps the economy out of a recession, but the housing sector is currently stagnating. Partly because of that, unemployment remains high, so people living in crowded arrangements or with their parents are not particularly inclined to form new households and spur growth in the housing market. This causes little growth in the housing market, which prevents a drop in the unemployment rate, and so on.

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