Fewer Americans form households after recession, hampering economic recovery

It had been a long road, but when Sabrina Torres received her master’s degree in 2010, she was sure it would eventually pay off in a good job that would allow her to afford an apartment.

She is still waiting. The American University graduate’s financial struggles have prevented her from living on her own, making her part of a dramatic slowdown in household formation that is both a consequence of the economic downturn and a continued obstacle to overcoming it.

The recession reduced the rate at which Americans set up new homes or apartments by at least half. Although the number of new households has begun to recover over the past year, its growth rate continues to lag behind its historic pace, according to Census Bureau statistics.

More than one in five adults between ages 25 and 34 live with their parents or in other “multi-generational” living arrangements, the highest level since the 1950s, according to the Pew Research Center.

Analysts estimate that there are more than 2 million fewer occupied homes than there would have been had Americans continued moving into new homes and apartments at the rate they did before the recession. Not only are young people returning to the nest in numbers not seen in generations, but also the weak job market and increased border enforcement have caused a marked decline in immigration, hobbling another major source of new households.

The slowdown has broad implications for the economy. It has trimmed demand for housing, even as the economy struggles to absorb the oversupply of new homes that came with the housing bubble and the millions of foreclosures that continue to weigh on the market.

An estimated two-thirds of the excess vacant housing in the country is the result not of the glut of housing construction that helped cause the downturn but by the drop in demand caused by the recession, according to the National Association of Home Builders. Both are culprits in the continued weakness in housing prices.

As the slump in the number of people finding their own places to live has chilled demand for new housing, it also has reduced sales of furnishings and appliances that typically accompany home sales, creating an additional drag on the recovery.

Housing has led the United States out of most of the recessions experienced since 1960, but if that vital industry is to significantly strengthen the current recovery, Americans are going to have to find their own homes at a more vigorous pace.

The question of what will provide that boost quickly leads to a conundrum: As the recovery gains additional momentum, households will resume their previous rate of growth, economists say. That would lower unemployment and promote stronger immigration.

But researchers also acknowledge that the recovery will not reach full steam until new homes are created at a stronger pace.

“It is hard to see what’s going to turn this around without better job and income growth,” said Daniel McCue, research manager at Harvard University’s Joint Center for Housing Studies. “But the way the job market is going, I don’t see any [immediate] change.”

The weak pace of household formation has lasted longer than the lulls caused by previous downturns.

“This time it is going to take longer to catch up,” said Gary Painter, a University of Southern California economist. “The state of the economy is really the prime factor in keeping households from forming.”

Meanwhile, the weak job market has reshaped many American families, with an increasing number of adult children moving in with their parents to make ends meet. A recent Pew survey found that 29 percent of parents with adult children report having a child who has moved back in over the past few years.

Torres has been unable to find a job beyond some part-time work that barely keeps spending money in her pocket.

“It is very, very frustrating,” she said, adding that she has leaned hard on her parents to help remain current with her student loans and other obligations.

She shared a place with her sister in Takoma Park before she moved in with her boyfriend in Silver Spring.

The share of young adults who have not gotten their own homes or apartments has been on the rise for several decades as more Americans have delayed getting married and having children and many have pursued graduate school to bolster their credentials. The weak economy has accelerated that trend, with people younger than 35 accounting for the largest share of the estimated 5.4 million people that researchers say have chosen not to join the labor force since the downturn.

With so many young people delaying their first forays into careers and the housing market , some researchers wonder whether households in the United States will begin to resemble those in parts of South America or Europe, where it is much more common for young adults to live in their parents’ homes for longer periods of time.

“That light at the end of the tunnel is an onrushing train called falling household formation,” Bentley University economist Scott Sumner wrote on his blog.

But where some see cause for concern, others see a silver lining of pent-up demand that will eventually lead to healthy gains in new household formation. That, in turn, would ignite a strong housing rebound that powers a robust economic rebound.

The jobless rate for people ages 25 to 34 — an age group considered vital to new household formation — has dipped from 9.2 percent to 8.6 percent in the past year, an improvement that coincided with a modest increase in people moving into homes and apartments.

That change has not been sufficient to restore past levels of household formation, although some researchers are hopeful for the future.

“The biggest driver of household formation is really young people coming out of their parents house and young people giving up living with roommates,” said Robert Denk, assistant vice president of forecasting and analysis at the National Association of Home Builders. “This has to happen. You can postpone moving out of your parents’ basement. You can postpone leaving your group house situation. You can postpone proposing to your sweetheart. But you can do these things for only so long.”

Michael A. Fletcher is a national economics correspondent, writing about unemployment, state and municipal debt, the evolving job market and the auto industry.
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