Could household formations go from boosting home sales to hindering them in 2020?

While the housing industry continues to flourish despite the tough economic times wrought by the COVID-19 pandemic, First American Financial Corp. is concerned that the outbreak’s impact on housing formations could bring about yet another downward pressure as the recovery continues.

Increasing household formations have been a booster for market potential of late, contributing to a year-over-year gain of 164,400 SAAR (seasonally adjusted annualized rate) potential existing-home sales in June, per First American’s data. It was one of three market dynamics boosting housing market potential during the month, along with an increase in house-buying power and rising house prices. The former, fueled by record low mortgage rates, adding an SAAR of almost 305,000 potential home sales, while the latter contributed SAAR of 40,360 units.

The three positive impacts helped offset a trio of downside pressures in June. Growing tenure length — the amount of time that homeowners reside in their homes — had the biggest negative effect on housing potential, trimming 354,200 SAAR potential home sales during the month. Tightening credit standards, which constrained the number of buyers that can qualify for mortgages, interposed to a year-over-year loss of 267,000 SAAR potential home sales, while the lack of new home construction and limited supply dealt an additional 2,450-unit loss.

Overall, that’s generally good news, as the three positive factors helped push potential existing-home sales to an SAAR of 4.88 million units in June, up 9.2% month over month. But according to Mark Fleming, chief economist for First American, there’s a possibility that household formation may shift from a positive to a negative factor before the end of the year, another unwelcome gift to the market from the novel coronavirus.

Household formation growth heightens demand for homes — quite simply, the more households there are in the country, the more potential for sales. With millennials reaching a prime window for forming households, household formation had hit more than one million per year pre-pandemic, according to 2019 numbers from the Harvard Joint Center for Housing Studies.

However, while it’s still too early to tell the true impact of the COVID-19 on household formation patterns, research on the effects of economic crises doesn’t portend optimism. Citing a study from the Federal Reserve Bank of Cleveland, for example, Fleming noted that the household formation rate dropped precipitously during the Great Recession, with young adults less willing or able to form independent households during labor uncertainty.

Fleming also referenced a separate study, conducted by the USC Lusk Center for Real Estate in 2011, showing that the likelihood of household formation by young adults decreases up to 4 percentage points during economic downturns.

The beginnings of such reductions may already be at play, Fleming said, with a study by John Burns Real Estate Consulting revealing over 1.1 million young adults between 23 and 30 moving back in with their parents between February and May 2020.

“Given this recession’s likely similar impact on household formation, we simulated the possible impact on the market potential home sales for June, keeping all other fundamental drivers of the potential for existing-home sales the same,” Fleming said. “If the number of households falls 1% relative to one year ago, the potential for existing-home sales would fall from its current level of 4.88 million SAAR sales to 4.71 million SAAR, a change of nearly 166,000 SAAR potential home sales.”

Any pullback in millennial household formation could spell a risk to what has so far been a resilient housing market, per Fleming, potentially as soon as the tail end of 2020.

“The pandemic and related economic impacts may turn household formation from a tailwind to a headwind for home sales later this year,” he said.


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