Housing glut blamed on drop in people forming households

U.S. household formations are at their lowest since 1947, data from the Census Bureau show. And that's helping to keep the supply of unsold homes at near-record levels nationwide, even though relatively few houses are being added to the inventory.

Between March 2009 and March 2010, the number of households rose just 357,000, according to the census data. In the previous 12 months, the number increased only 398,000, the third-smallest increase on record since World War II.

Between 2002 and 2007, before the economy started on its downward trajectory, household formations averaged 1.3 million a year, U.S. census data show.

"That's the consequence of the consumer fear of what's happening with the economy and with the job market," said Lucien Salvant, a spokesman for the National Association of Realtors.

"When people are afraid of losing their jobs or not being able to get into the job market, they are not thinking about buying a home," Salvant said. "Many opt to stay at home with parents, or to share rentals with friends."

The nation's gross vacancy rate - the proportion of housing units that are vacant - stood at 14.5 percent at the end of the second quarter of 2010, census data show.

In a well-functioning economy, household formations "would be closer to 1.25 million," said Mark Zandi, chief economist of Moody's Analytics in West Chester.

During normal times, builders need to add about 1.7 million houses a year to meet underlying demand stemming from, among other things, the need for replacement homes and the desire for second homes, as well as conversions from nonresidential to residential uses and increases in the number of households.

For example, about 250,000 new homes are needed per year to replace houses that are destroyed by fires and natural disasters or that wear out from neglect or old age. Demand for second homes combined with other miscellaneous factors accounts for 50,000 to 100,000 new houses a year.

Household growth typically requires 1.3 million to 1.4 million units.

"The sharp drop in household formation largely explains why the housing glut remains stubbornly high, despite the plunge in housing starts in recent years," said housing economist Patrick Newport, of IHS Global Insight in Lexington, Mass.

Two major sources of household formation - immigration and marriage - remain well below the averages of recent years.

The National Center for Health Statistics reports that the number of marriages per thousand population fell from 8.2 in 2000 to 6.8 in 2009. Divorces per thousand population fell from 4.0 in 2000 to 3.4 in 2009.

There are no hard data on "doubling up" - young people sharing rentals or moving in with their parents in a tight job market - though anecdotal evidence indicates the latter has become more commonplace in recent years.

During the late 1990s and in the first years of this decade, the housing industry banked on immigration for a good part of its growth.

Between 1990 and 2000, the U.S. population grew by nearly 33 million, with almost half of that gain attributable to immigration, according to data provided in 2003 by James Johnson Jr., a professor at the Kenan-Flagler Business School at the University of North Carolina in Chapel Hill.

In the 1990s, census data show, immigrants accounted for 250,000 household formations a year. Immigrants typically rent for their first few years in this country, housing economists say. Then, after becoming established, they become a major factor in the for-sale marketplace.

Newport believes that a drop in immigration might have played a greater role early in the recession than it did later on. In 2009, census data show, households headed by the native-born under age 35 fell by 338,000, indicating that doubling up was the larger contributor.

The number of households headed by those ages 15 to 24 fell 124,000 (students moving back in with parents), while households with six or more people rose 355,000, an 8 percent increase.

A common misconception, Newport said, is that foreclosures account for the oversupply of houses.

"A foreclosure or a bank taking possession of a home," he said, "does not by itself add to the housing glut."

If a household vacates a home and moves into a rental unit, the housing supply is unchanged. Supply increases, however, if one household moves in with another, Newport said, or if its members become homeless.