1.2 million households were lost from 2005 to 2008, despite the population increase of 3.4 million in the study area, as Americans experienced one of the deepest recessions in decades, according to a study released today by the Mortgage Bankers Association (MBA). This decline in households is likely what contributed significantly to the excess supply of apartments and single family homes on the market.

The study entitled, “What Happens to Household Formation in a Recession,” which was conducted by Professor Gary Painter of USC and sponsored by the Research Institute for Housing America (RIHA), analyzes the impact of economic and housing conditions on household formation and how the recent recession has affected Americans’ propensity to form new households, mobility trends, and changes in the rate of overcrowding.

“With such a significant drop in households nationwide, it is clear the most recent recession impacted individuals’ decisions to move out on their own and caused many Americans to join already formed households,” said Painter, associate professor in the School of Policy, Planning and Development at the University of Southern California. “Due to data limitations, my analysis had to focus on household formation as of 2008. Clearly, given the depth of the downturn in 2009, and the ongoing weakness in the job market through the beginning of this year, this study gives no reason to expect that household formation has picked up at all.”

“This study clearly indicates that household formation will only pick up once the job market stabilizes. Young adults need not only a paycheck, but also a sense that they have sustainable employment before striking out on their own,” continued Painter. “Typically, many new households are renters, but if young adults postpone moving out, some may have the ability to save for a downpayment, causing them to skip the rental stage and move right to homeownership.”

“Given the strong tie between unemployment rates and household formation, household formation will likely return to normal levels by 2012 as unemployment rates decline over the next two years. There is no demographic silver bullet that will solve the supply overhang we are seeing in many housing markets around the country. The housing and mortgage industries will feel the impact of this reduction in the number of households for years to come,” Painter continued.

Michael Fratantoni, MBA’s vice president of Research and Economics added, “We hear stories about young adults remaining in or returning to the nest after college and of households doubling up. We wanted to go beyond the anecdotes to provide our members with hard numbers on the trends in household formation that will impact demand for both single-family and multifamily properties.”

The study includes analysis of data from the past 40 years, a period covering 6 recessions, to examine the historical impact of recessions and associated elevated unemployment rates on the formation of new households.

Key findings from the study include:

• In a recession, the likelihood that a young adult will form an independent household falls by up to 4 percentage points depending on the age of the person and severity of the changes in unemployment rates. In this particularly severe recession, this prediction has been borne out with data through 2008 revealing a reduction of nearly 1.2 million households nationwide despite the continued increase in population and likely even more households lost in 2009.
• Though the national homeownership rate has fallen from a peak above 69 percent to just over 67 percent, this decline may be understating the magnitude of the change when we take into account the simultaneous drop in renter household formation. In fact, the rental market saw a steeper decline in new households formed than the homeownership market. As a result of this drop, the denominator in the homeownership rate calculation has been reduced, mitigating the decline in homeownership.
• This recession has also caused a dramatic increase, almost five-fold, in the rates of overcrowding (defined as having more than one person per room in the household), indicating that many families are doubling up in response to the downturn.
• Overall, there was a greater impact on the creation of new households among native born Americans over new immigrant households. The data show native born Americans experienced a larger decline in household formation and a larger increase in overcrowding rates than immigrants.
• Children whose parents have higher incomes are more likely to remain at home, with this effect largest for youths moving into the rental market. However, children whose parents have higher financial wealth are more likely to form their own new rental households.