In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Thursday, March 28, 2013

A comment on Jobs, Household Formation and New Residential Construction

by Calculated Risk on 3/28/2013 02:40:00 PM

Just a few thoughts based on some recent conversations: The key driver for new residential construction, both single family and rental properties, is household formation. And household formation is mostly driven by jobs.  So jobs are the key driver for new residential construction.

But wait ... there are about 3 million fewer payroll jobs now than at the start of the recession. So why do we need any new housing units?

Two frequently mentioned reasons are more foreign buying (so jobs are not a driver), and that housing is not transportable, so some areas will need more housing.    However many areas are seeing a pickup in construction (not just areas with better job growth).    There probably is more foreign buying, especially in the gateway cities like New York, Miami (for South American buyers), and in California for Asian buyers, but that doesn't explain all of the apparent disconnect between total jobs and households.

I think the real reason for the changing ratio between total jobs and households is demographics.

In the decade from 1994 through 2003 (data started in 1994), the BLS reported the number of people "55 and over" and "not in the labor force" increased by 4.3 million.  But in the last 9+ years,  from January 2004 until February 2013, the BLS reports the number of people over 55 and not in the labor force increased by 8.1 million. So more older people are leaving the labor force.

And older people tend to live in smaller households (see from the Census Bureau: America’s Families and Living Arrangements: 2012), and this has pushed down the overall household size - even with some people doubling up. The overall mean household size in America is 2.55, but that falls to 2.29 for householders in the 55 to 59 age group, and 2.07 in the 60 to 64 age group, 1.91 in the 65 to 74 age group, and to 1.60 for those 75 and older.

This increase in the number of retired Americans with smaller household sizes means the relationship between jobs and households has changed over time.   Models of the relationship of number of households to jobs have to be modified to include changing demographics - and this is one reason why the US needs more housing.