Where are all the new households?

You probably know a kid or two in their twenties or early thirties still living at home with the folks. You might even be one. This has become way to common in the last five years.

According to Fortune, it’s an epidemic: “The share of 18 to 34-year-olds living with their parents rose from about 27.6% before the Great Recession in 2007 to above 31%, where it remains today, according to an analysis by Trulia.”

But there may be some good news on the way – according to Bank of America Merrill Lynch economists, a change in trend may be underway…

We believe there is “pent-up” household formation of 2.5 million generated from the past few years of feeble growth. From 2007 through 2011, household formation averaged about 550,000 a year, a considerable slowdown from the average of 1.25 million over the prior 10 years. Household formation is a function of population growth and the percentage of the population to form households. Population growth has remained fairly stable, with an increase of 20-34 year olds, which is the primary age for household formation. We therefore believe that the decline during the recession was mostly due to economic conditions – weak labor market, foreclosures which forced doubling-up of households and delayed life events such as divorce and childrearing.

Comparing the first half of this year to last year shows we are on pace for annual growth of only 500,000 households. In order to match last year’s rate of 1 million, we would need to see a rapid acceleration in the second half of the year and/or revisions to the first half. Given the reliability of the real-time data, it is not unreasonable to assume both may occur. Even after smoothing the data to show the annual change of the 12 month moving average, there are notable swings in the time series (Chart above). We pencil in a trajectory to derive household formation of one million, which looks reasonable to us given the historical trend.

Source:

BAML