Introduction
- 8 -
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
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.