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.
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