A Blog by Jonathan Low


Jun 22, 2012

What's Stalling the Housing Market? An Absence of New Families and People Who Can Afford Their Own Place

Reports continue to suggest that the US housing market, historically one of that economy's strongest engines of growth, remains anemic.

Speculation has centered on bank lending policies but there may be a more basic and troubling reason: a lack of new families. The numbers are daunting: 9 million families are essentially out of the market because they have recently suffered delinquency or foreclosure. On top of that, another 16 million are struggling with mortgages that are 'under water' which means they are behind in their payments or their homes are worth less than the mortgages they took out to finance them however many years ago.

This means 25 million families who are financially constrained and can not qualify for funding. According to the latest census figures, there are 114 million households in the US, so approximately 22% of them are unable to purchase new homes.

But there is more. The issue is 'household formation.' This means newly-weds or young, single people just out of high school, college or the service who are ready to move away from the 'rents, get a job and, usually, an apartment. The problem is that the stubbornly high 8% unemployment rate and declining income levels (especially for younger people) means that instead of striking out on their own, they are living at home, with relatives or doubling up with friends. The rate of 'shared households' has risen over 11%, while the rate of all households is rising at about a 1.3% rate. In other words, all those jokes, tv shows and movies about adult children living at home are a)on the mark and b) negatively impacting the market and the economy.

Until policies are contrived to stimulate the jobs and incomes that will, in turn, generate demand for new houses, cars and the other impedimenta of middle class life, economic growth is likely to remain weak. And that is not a joke. JL

David Dayen reports in FDL:
A new report by the US Census shows why it’s going to be so difficult to get a housing recovery going. We already have seen that the 9 million families locked out of the market by virtue of a recent delinquency or foreclosure dampens supply. The up to 16 million families who are underwater have almost no chance at being “step-up” buyers, purchasing a bigger home or a home closer to a new job.

The only way to generate demand, then, would be to have a run of first-time homebuyers with good credit, typically young people just getting into the housing market. But the Census report shows that household formation just isn’t happening these days:

This research defines a shared household as a household with at least one resident adult who is not enrolled in school and who is neither the householder, nor the spouse or cohabiting partner of the householder. In spring 2007, there were 19.7 million shared households. By spring 2010, the number of shared households had increased by 11.4 percent, while all households increased by only 1.3 percent (Table 1). In 2010, shared households accounted for 18.7 percent of all households, up from 17.0 percent in 2007.

This is not about the marriage rate rising, it’s about multi-family shared homes, roommates, etc. So the rate of shared households, defined thusly, is going up. And considering the stagnating wages, high unemployment, and lack of purchasing power in the broad middle, this stands to reason. And it will continue to be a problem, even if the banks keep enough homes off the market to constrain industry and lower months-of-supply.

The big stat here is that additional adults living with a relative rose from 2007 to 2010 by 2.4 million, accounting for 68% of the increase in this metric of shared households. That just goes right to affordability. People cannot afford to live on their own, so they move back in with their parents or another relative. Household formation remains low as a result.

I keep hearing that this will break, like a fever, and people will move out of their parents’ homes, perhaps get married and start families, and return to the housing market. But they have to have a job to do that. They have to be unburdened by student debt. What I see is that these millions just add on to the 9 million foreclosed and the 16 million underwater as those locked out of the housing market. That number is starting to look daunting. And without those purchases, and with the threat of more foreclosures in certain regions (like Colorado), it’s hard to predict prices bottoming out


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