With an annual population growth of 1% and a wave of foreclosures turning borrowers into renters, why hasn’t there been a substantial increase in demand with accompanying rental appreciation? In fact, why have real estate investors struggled more than ever to find and keep good tenants?
It turns out that the expectation of increased rental demand is exactly the opposite of reality. Rental demand has shrunk. A recent report by the Research Institute for Housing America and the Mortgage Bankers Association, titled “What Happens to Household Formation in a Recession?” details a study comparing 80 metropolitan areas in 2005 and 2008.
The model based on the past 6 recessions predicts household formation likely fell by 2- to 4-percent and that the formation of owner households likely fell by 1-percent. Actual data confirms 3-percent overall.
The recession has caused a loss of 1.2 million households, despite a population increase of 3.4 million (which should have created an additional 1.3 million households). We are looking at a total swing of 2.5 million households. It is unclear if the worsening unemployment situation of 2009 (a 60% increase) was taken into account.
[I]ncreases in state unemployment rates depress both rental and owner household formation rates. Higher state unemployment rates have the largest impact on an individual’s decision to form an owner household. However, conditional on the state’s unemployment rate, being in a recession also lowers the rates of rental household formation.
Additionally, the report finds:
- Not having a job leads to a reduction of more than 10 percentage points in renter household formation and a reduction of about 2 percentage points in owner household formation (Again, if this report does not account for continued job loss in 2009, then perhaps we can guess that an increase of 1% unemployment is equivalent to 2 percentage points in renter household formation - which would likely mean we took an additional 7% hit in renter household formation in 2009.)
- No statistical impact of higher house prices on household formation
- Higher median rents in the census tract of residence lowers the rates of rental household formation significantly
The special report indicates we are likely to return to normal household formation by the end of 2012, but will still have to recover from the current deficit in household formation.
The solution... jobs, American jobs.
Caution. Just as we have echo boomers, I suspect we are likely to see an echo housing boom. These recessionary years of high unemployment, over-crowding, and repressed household formation will either create a pent-up demand for people to be out on their own (new household formation) as soon as the economy is relatively improved or else we will have a major cultural shift of families / extended families living together in tighter quarters. I’m betting on the echo boom – but not until we have a substantial turn around in our economy.
