September 13, 2011

 

Introduction 

 

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and March 2009. This represented the smallest increase since 1983, and the second lowest increase since the 

inception of the survey in 1947. Importantly, greater than all of the increase was driven by new households 

aged 65 years old and older (up 721,000), while all other age groups reported varying levels of decline for the 

period. This trend has been a clear negative for residential housing demand, and this lack of household growth has 

been driven by several key factors. 

 

Source: Western Asset Management Company, 2011 

Among the drivers of weak household formation is a significant increase in adult children who elect or are 

economically forced to reside with parents or older relatives. Many young adults (typically within the 20s-30s age 

range) are among the most impacted by the uncertain economic environment. Certainly, recent college graduates 

face a challenging employment environment, and may find it financially unfeasible to purchase a home. Among 

those able to secure employment, the general lack of stability and confidence within the marketplace makes such a 

large financial transaction a less desirable option. Accordingly, the U.S. is now experiencing a historic resurgence 

in “Multi-Generational Households.” According to Pew Research, 20% of adults aged 25-34 lived in a multi-

generational household in 2008, up from a low of 11% in 1980. However, it should be noted that there already had 

been an increasing trend toward multi-generational households prior to the 2008 recession (see chart).  

 

U.S. Population Living in Multi-Generational Family Households, 1940-2008  

(millions) 

 

Source: Pew Research Center 

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Introduction 

 

       - 9 - 

Another contributing factor to sluggish household growth has been a deceleration in U.S. marriages. 

Clearly, the trend of individuals waiting longer to marry was already apparent prior to the economic slowdown. On 

average, U.S. males and females currently marry at the ages of 28 and 26, respectively (Pew Research). For both 

genders this represents an increase of about 5 years since the 1970s. However, the poor market environment 

served to reinforce the trend toward delaying marriage. According to a CDC (Center for Disease Control) study, 

U.S. marriages totaled 2.08 million in 2009, a 9% decline from 2004 levels, despite a 4.5% increase in overall U.S. 

population during that same period. This translated to a marriage rate of 6.8 per thousand, down from 7.8 in 2004 

(a 13% drop on a per thousand basis).  

The economic uncertainty has also caused many to delay potential divorce proceedings, further limiting 

formation of new U.S. households. According to the CDC, divorces and annulments per thousand stood at 3.5 in 

2009, down from a 5-year average of 3.7 prior to the recession. In a 2011 survey by the National Marriage Project 

at the University of Virginia, 38% of people considering a divorce elected to delay further proceedings due to the 

recession. At this stage, we would conclude that this is a temporary obstacle to near-term household formation, and 

does not necessarily reflect a secular change in the divorce rate from historical averages. 

Another key driver of U.S. household formation is immigration. During the 1980s, immigration accounted for 

16% of new household formation, and that figure nearly doubled by the 1990s. Like other groups, immigrants 

typically view home ownership as a desirable goal that signifies both wealth and financial security. Immigrants tend 

to have lower ownership rates relative to the native population, but that gap typically narrows over time, and second 

generation Americans actually have above average home ownership rates (source: Fannie Mae). By 2007, over 

10% of U.S home owners were foreign born. However, economic uncertainty has also impacted this group as well, 

curtailing both new immigration and home ownership by existing immigrants. According to a report from the Pew 

Hispanic Center, the average annual inflow of unauthorized immigrants into the U.S. has declined by over 60% 

during the past decade. Although this may partially reflect enhanced border security, the reduced economic 

prospects in the U.S. likely represent a root cause as well. Despite this recent reduction, immigrants are expected 

to remain a key driver of household growth over the long-term, and we would expect immigration rates to regain 

momentum once the U.S. returns to a more robust growth trajectory. 

All of the previously mentioned factors are clear near-term negatives for both household formation and 

overall demand for residential real estate. However, we believe many of these issues are temporary in nature, and 

household formation trends should regain momentum once U.S. economic fundamentals improve. The recent rate 

of household formation is likely at an artificial low, creating the potential for a significant “snap-back” as pent-up 

household formation recovers to more normalized levels. According to Harvard’s Joint Center for Housing Studies, 

an estimated 12.5 million households are expected to be created over the next decade. This forecast implies 

1.25 million new households per year, more than triple the levels achieved in 2009. Assuming such a forecast is 

remotely feasible, demand for residential real estate should eventually be poised for a significant recovery.  

However, it is worth noting that at least part of the previously mentioned trend toward multi-generational 

households may represent a long-term secular trend. In particular, this trend will likely be supported by growth 

among Hispanic and Asian citizens as a percentage of the overall country. According to Pew Research, 22% of 

Hispanics and 25% of Asians reside in multi-generational households, compared to a rate of only 13% for White 

households (see following chart). In addition, multi-generational households could increase as the baby boomer 

generation reaches more advanced age, and seniors consider residing with younger relatives. Overall, we regard 

this issue as a minor headwind for household formation and housing demand, but do not consider it a significant 

obstacle to the long-term fundamental outlook for improved household formation and housing demand. 

 

 

 

 

 

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