Some Thoughts on a Surprising Household Growth Estimate

by Dan McCue
Research Manager

Many media outlets and blogs (including our own), have reported on the results of the Housing Vacancy Survey (HVS) for the fourth quarter of 2014, which showed the US homeownership rate had dropped to its lowest point in fully 20 years. But the fourth quarter HVS contained another surprising reading—one that could be even more noteworthy than the continued fall in the homeownership rate. The HVS is one of very few sources of short-term estimates of household growth – an important gauge of housing demand.  And the surprise here was that HVS data show household growth going through the roof in the fourth quarter of 2014, with year-over-year growth in excess of 1.6 million households. This comes after household growth had long been stalled out, averaging less than 600,000 per quarter for much of the previous five years (Figure 1).

The concern and attention surrounding this number breeds from the thick cloud of uncertainty behind trends in household growth. Survey data from the Census Bureau such as the HVS, ACS, and CPS/ASEC give different and sometimes conflicting measures of household growth year-to-year, each with wide margins of error, which makes it difficult for analysts to call out trends with much confidence.  Amidst this lack of clarity is a widely held anticipation, or possibly hope, that household growth, having been ‘pent-up’ after such a long period of weakness, is primed to rebound strongly and this Q4 number from HVS might signal an inflection point.

Source: US Census Bureau, Housing Vacancy Survey Revised Estimates of the Housing Inventory: 2000 to Present, Table 8a.

One possible explanation for such an abrupt change in the rate of household growth in the fourth quarter HVS would be some change in how the survey is conducted or weighted that caused a discontinuity in the series. But the folks at HVS report that there were no structural or methodological changes to the dataset that would have been behind the sharp rise.

Without any methodological justification for the sudden jump, another factor may be some degree of sampling variation that produced an abnormally high estimate for the quarter. HVS has noted that quarter to quarter variability within the survey has increased and in many respects, this Q4 number is simply a prime example of how erratic quarterly data in the HVS can be and why we prefer not to make much of any one quarter and opt instead to look at rolling averages or other smoothed versions of this data to get a sense of recent trends.  But even averaged over the previous four quarters, Q4 still pulls the annual household growth reading for 2014 up significantly, to 789,000, representing a significant increase from the 524,000 annual growth reported for 2013, although still well below the long-run pace of 1.2 million per year that the Joint Center estimates is the baseline amount to expect given current levels of adult population growth and changes.

Alternatively, this fourth quarter increase could be a sign that the HVS is simply catching up to reality with its household counts after underestimating household growth over the past several years, In fact, prior to the 4th quarter results, the primary concern with HVS estimates was that they were overly low (see previous blogs on the topic here and here), in showing continued weakness in new household formation even as the economic recovery continued to gain steam.

Indeed, there are a variety of other market indicators that would suggest that household growth has been increasing at a modest pace in recent years and more than has been suggested in HVS quarterly releases prior to Q4. Most notably, employment growth has been ratcheting up over the last three years, from 2.3 million in 2012 to 2.4 million in 2013 and 3.1 million last year. Importantly, these gains have also been felt among young adults who are so important to household formation, with the unemployment rate of those age 25-34 dropping from 8.9 to 5.9 percent over this period. The slow rise in housing starts from 550,000 in 2009 to 1.0 million last year, at the same time that vacancy rates have declined, also suggests that household growth has been picking up steadily over this period.

In short, given the nature of survey data, we are not putting too much trust in the accuracy of this one quarter’s estimate of household growth reaching a 1.6 million annual pace, but do believe household formation has been gaining momentum, which bodes well for a stronger housing recovery in 2015. But there are also headwinds. Indeed, rising rents, declining rental affordability, and rising student debt levels remain barriers to household formation for many. Given the lack of clarity, certainly there is good reason to keep an even closer eye on this important measure over the course of the coming year. 

What Will Stop the Slide in Homeownership Rates? Keep Your Eye on Incomes.

by Chris Herbert
Research Director

As highlighted in our new State of the Nation’s Housing report, the national homeownership rate declined for the 9^th straight year in 2013 and now stands at its lowest point since 1995 (see Figures 18a and b, from our report, below). The falloff in homeownership has affected a broad range of demographic groups, but has been most severe among those in their late 20s through their early 40s, with their rates down at least 8 percentage points since 2004. In fact, while the overall homeownership rate is still slightly above the pre-boom rate of 64 percent, the share of households age 25-44 owning a home is at its lowest point since annual data became available in the early 1970s. Since these are prime ages for both first-time and trade up homebuyers, this substantial decline in owning has been an important reason for the continued weakness in the housing market.  

Predicting when homeownership rates will stabilize—and possibly turn back up— must begin with an understanding of what’s been driving the downturn.  There are many culprits. The dramatic fall in home values, which decimated housing wealth and forced millions into foreclosure, has made everyone far more aware of the financial risks associated with buying a home. Still, our analysis, and a variety of other surveys, indicate that the majority of young adults want to own a home someday. So changing preferences for owning would not seem to account for such a dramatic falloff in the homeownership rate over such a short period.

The incredible increase in the use of student loans is no doubt also a contributing factor.  Between 2001 and 2010 the share of 25-34 year olds with student loans rose from 26 to 39 percent.  And since 2010 the total amount of student debt outstanding has increased by about 40 percent.  At the same time, however, the median amount owed among 25-34 year olds only rose from $10,000 to $15,000 between 2001 and 2010, which should not be a substantial deterrent to buying a home.  Our analysis also found that the share of these young borrowers with high amounts of debt ($50,000 or more) rose from 5 to 16 percent, but this still a minority of all households in this age group. A recent Brookings Institution report came to a similar conclusion, finding that the median loan payment to income ratio has not exceeded historical levels.  So while mounting student loan debt and increasing delinquency among these borrowers is not the main reason young Americans are deferring homeownership, it is certainly a factor.

Today’s far more restrictive mortgage underwriting standards are another limitation for those looking to buy a home.  The decline in lending to borrowers with credit scores in the 600s has pushed up the average score for new borrowers well into the 700s. Since roughly half of all consumers have credit scores under 700, this is making it hard for many to qualify for mortgages. While there are some indications that lenders are starting to relax their standards, so far there hasn’t been much movement in the average score for borrowers.

But at a fundamental level, it may not be necessary to look much further than trends in household incomes to explain the rise and fall in homeownership over the past two decades.  Median household income for 25-34 year olds and 35-44 year olds grew sharply from 1994 through 2000, during a period when homeownership rates showed steady gains. Growth in homeownership then slowed as incomes softened during the mid-2000s (see Figure 4, from our State of the Nation's Housing report, below).

While many blame lax underwriting for driving the homeownership rate boom, in fact much of the gains occurred during the 1990s when the economy was producing solid income growth. Since 2006, median household incomes have fallen substantially for those 25-44, with the homeownership rate declines mirroring these trends.  In fact, just as the share of households 25-44 owning a home is as its lowest point since the early 1970s, the real median household income for this age group is at its lowest point since 1972. So, while young households are facing a number of headwinds to buying a home, until we see a resumption in income growth we are unlikely to see an upturn in homeownership rates.

Millennials the Key to a Stronger Housing Recovery

The U.S. housing recovery should regain its footing, but also faces a number of challenges, concludes The State of the Nation’s Housing report released today by the Joint Center. Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are moderating growth and keeping millennials and other first-time homebuyers out of the market.

The housing recovery is following the path of the broader economy.  As long as the economy remains on the path of slow, but steady improvement, housing should follow suit.

Although the housing industry saw notable increases in construction, home prices, and sales in 2013, household growth has yet to fully recover from the effects of the recession. Young Americans, saddled with higher-than-ever student loan debt and falling incomes, continue to live with their parents.  Indeed, some 2.1 million more adults in their 20s lived with their parents last year, and student loan balances increased by $114 billion.

Still, given the sheer volume of young adults coming of age, the number of households in their 30s should increase by 2.7 million over the coming decade, which should boost demand for new housing. Ultimately, the large millennial generation will make their presence felt in the owner-occupied market, just as they already have in the rental market, where demand is strong, rents are rising, construction is robust, and property values increased by double digits for the fourth consecutive year in 2013.

One key to realizing the millennials’ potential in the housing market is for the economy to grow to the point where their incomes start to rise. Another important factor is how potential GSE reform will affect the cost and availability of mortgage credit for the next generation of homebuyers, which will be the most diverse in the nation’s history. By 2025, minorities will make up 36 percent of all US households and 46 percent of those aged 25–34, thus accounting for nearly half of the typical first-time homebuyer market.

The report, as well as an interactive map released by the Joint Center, also highlights the ongoing affordability challenge facing the country, as cost burdens remain near record levels and over 35 percent of Americans spend more than 30 percent of their income for housing. The situation is particularly grim for renters, where 50 percent are cost burdened and 28 percent are severely cost burdened (meaning they spend over half of their income for housing).

Click map to launch; may take a few seconds to load.

When available, federal rental subsidies make a significant difference in the quality of life for those struggling the most.  Between 2007 and 2011, the number of Americans eligible for assistance rose by 3.3 million, while the number of assisted housing units was essentially unchanged. Sequestration forced further cuts in housing assistance, which have yet to be reversed.

Employment and Gateway Cities

by David Luberoff
Guest Blogger

From time to time, Housing Perspectives features posts by guest bloggers. Today's post was written by David Luberoff, senior project advisor to the Boston Area Research Initiative at Harvard’s Radcliffe Institute for Advanced Study.  David will be a panelist at an upcoming Joint Center for Housing Studies event, Opening the Gates of Opportunity: Realizing the Potential of Gateway Cities, taking place at Harvard on Friday, April 18.  More information about the event is below.


Historically, the gateway cities of Massachusetts have been important regional economic centers, drawing workers each day from neighboring cities and towns.  However, today many gateway cities attract fewer employees from surrounding communities while many residents of those cities travel to suburban jobs, according to data from the Census Bureau’s 2006-to-2010 American Community Surveys (ACS).

Lawrence, Massachusetts

As the table below shows, eight of the state’s ten most populous cities are gateway cities, which are defined as midsized urban areas where average household income and rates of Bachelor degree attainment are below the state average.  (The exceptions are Boston and Cambridge).  But only five gateway cities – Worcester, Springfield, Quincy, New Bedford, and Lowell – are on the top ten list of where jobs are located. The three gateway cities on the top ten list for population – Brockton, Lynn, and Fall River – are replaced on the top ten list for jobs by Waltham, Newton, and Framingham.

Even more striking, among the large gateway cities, Springfield and Worcester are the only places where the number of non-residents coming into the city to go to work exceeds the number of people leaving to work in other locales.  This doesn’t mean that no one commutes into gateway cities.  In general, however, the share of jobs held by local residents is higher in gateway cities (with the notable exception of Quincy).  Additionally, residents of gateway cities farther from metro Boston seem more likely to live and work in the same locale.

Consider, for example, patterns in Lawrence.  According to other data from the ACS, about 7,904 of the about 30,052 Lawrence residents who are workers have jobs in that city.  Another 2,665 work in Methuen, while between 800 and 1,200 work in Boston, Haverhill, Woburn, Andover, Danvers, and Wilmington. Of workers coming into Lawrence from other communities, 2,420 come from Methuen, 1,650 from Haverhill, and 860 from Lowell.  No other locality sends more than 350 people.  It’s also worth noting that more workers commute from Lawrence to nearby Andover (which has more than 30,000 jobs) than from any other locality, including Andover. (Click table to enlarge.)

Source: Commuter Adjusted Daytime Population: 2006-2010 5-year ACS

These data suggest that policies designed to strengthen gateway cities should seek opportunities to make those localities more attractive to firms that draw employees from both the city and surrounding communities.  At the same time, policymakers should seek opportunities to better connect residents of the state’s gateway cities with jobs in suburban locales as well.

These and other challenges and opportunities of gateway cities will be discussed at a half-day event taking place at the Harvard Graduate School of Design next Friday, April 18^th. Opening the Gates of Opportunity: Realizing the Potential of Gateway Cities is free and open to the public, but advance registration is required. Please register to attend or watch the live webcast on the Joint Center website (no registration required for the webcast).