Household Formation: Pent-Up Demand Is High

The current rate of household formation in the United States is still well below the expected trend and faulted as a major culprit for “pent-up demand.” According to an analysis by Trulia, an online residential real estate site, potentially 2.4 million households are hitting the pause button. The majority of that number is comprised of young people between the ages of 18 and 34 who have delayed moving out on their own for a variety of reasons.

An average of 1.1 million new households are formed each year in the United States. But from the first quarter of 2008 to the first quarter of 2011, just 450,000 new households have been added on an annual basis. This sluggish rate means a decrease in the overall demand for housing, which affects the annual construction rate. But this “pent-up demand” driven by young adults who are still living at home or doubling up with roommates is bound to give way, say some housing experts.

Will household formation increase sooner or later? Housing Wire is optimistic, reporting that the conditions are better today for emerging households. Steady job growth over the last several years is a good sign. Sterne Agee analyst Jay McCanless says, “We believe steady, if unremarkable, monthly job growth is creating a…household formation environment for 2013 which should support our positive housing outlook.”

If that projection holds true, increased demand is merely a matter of time. When households come out of hiding looking for single- and multi-family residences or apartments, they could potentially inundate the market.