Don't Be Distracted by the Recent Swings in Household Formation Estimates
Household formation is essential to the growth of U.S. housing markets, as it generates demand for about three out of four new housing units1. When the Census Bureau's fourth quarter 2014 Housing Vacancy Survey (HVS) reported that annual household formation jumped to nearly 2 million, analysts became hopeful that this fundamental market driver had finally broken out of its post-crisis doldrums. Unfortunately, optimism has been short-lived, as the last two quarterly estimates from the HVS have shown household growth plummeting to only about half a million per year – a level not far above the worst readings from the Great Recession.
A new edition of Housing Insights from Fannie Mae's Economic & Strategic Research Group explores the factors underlying the recent volatility in HVS household growth estimates. It finds that two apparent anomalies – a historically large increase in the HVS housing unit occupancy rate during late 2014 and a divergence during the last two years between the survey's housing stock growth estimates and independent data on new housing construction – have contributed to the recent swings in the survey's household formation estimates.
The Housing Insights also develops an alternative household growth series that is based on a smoothed trend in housing unit occupancy rates and a new set of housing stock estimates. This alternative series suggests that, rather than surging and then diving in recent quarters, household growth has been on a gradual path of recovery from the severe downturn of the Great Recession (see chart below). The alternative series indicates that about one million households were added during the most recent year, a level of growth consistent with estimates produced by other researchers using different methodologies.
These alternative household growth estimates should temper some of the late-2014 exuberance and allay some of the more recent concerns over the trajectory of household formation. They suggest that recent trends in household growth are consistent with a gradual, albeit frustratingly plodding, housing market recovery.
1 "Household formation" and "household growth" are used interchangeably here to describe the net increase in the total number of households between two points in time.
Director, Strategic Planning
Economic & Strategic Research Group
June 16, 2016
The author thanks Orawin Velz and Mark Palim for valuable comments in the creation of this FM Commentary. Of course, all errors and omissions remain the responsibility of the author.
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