Longtime readers know that one of my abiding interests is in household formation among the younger generations in US and Canada. I even have a whole category/tag devoted to it: Generation Screwed – Millennials and Beyond. Thanks to a new post by Zillow Research, we have another opportunity to dip back into this evergreen topic.
The post is titled, “Returning home: The impact of the pandemic recession on GenZ and millennials” and it’s a short, rather accessible read. It’s mostly about how young people, now Gen-Z rather than Millennials, are suffering from the COVID pandemic and the government-created recession due to it. The core insight is that the pandemic forced millions of young adults back home to mama:
They’d rather be out on their own, but the pandemic has led millions of young people to move back to their family homes. Roughly 2.1 million more U.S. adults — most between 18 and 29 years old — were living with a parent or grandparent in April, 2020, compared to a year earlier, according to the U.S. Census Current Population Survey data. And though the trend is already beginning to turn around, it’s forcing life changes that are likely to linger.
Sure, that makes sense. But buried in the story, we find this:
Economists have this phrase, “missing households,” to describe the fact that fewer people are striking out on their own to find places to live. Zillow economists estimate there are 5.7 million missing households today — the number of new familial units Americans would have formed if people moved out of the nest at the same rate as they did in 2006.
Before moving home, LaDuke and her fiancé were saving for a down payment to buy a house. That cash has turned into their COVID emergency fund. LaDuke says it’s not that millennials don’t want to buy, “but unless our generation has that big chunk of family support or really lucks out or desires to live in a really less expensive place, it, it’s not possible.”
LaDuke says low wages are the biggest barrier. Incomes have failed to keep pace with increasing home values. A Zillow analysis shows that since September 2014, home values have grown 38.3 percent, roughly double the pace of homeowner income growth (18.8%) over the same period. “It’s not a moral failing (of millennials),” says LaDuke. “We’re very skilled and we have a lot going for us. What we don’t have is the finances to back that up.”
If you’ve been following my writings and my work over the years, you already know that I’ve been saying that the trouble with Millennials is that the Elite Millennials are doing better than any previous generation, while the non-Elite Millennials are doing worse than anyone ever before them.
As we make our way into 2021, the topic that most of the industry simply doesn’t talk about enough is family formation. It’s been suffering for years as Millennials delay or entirely forego marriage. That trend has continued for Gen-Z. It shows no sign of abating, and that will have dramatic long-term impact on housing.
Household Formation… Can’t Happen Without Family Formation
First, let me observe that according to Zillow Research, we saw a blip upwards in household formation rates in 2018 and 2019:
The simplest explanation for why household formation fell much more quickly over the past decade or so is that for much of that time, Americans faced a handful of unique financial challenges. First, massive amounts of savings and equity were lost in the 2008 financial collapse and subsequent foreclosure crisis, impacting the ability of both older generations to retire and younger ones to shield their children from substantial college debt. At the same time, job opportunities and incomes fell precipitously from 2007-2011, which has long-lasting effects on individuals’ ability and confidence to start a new household. And finally, at points during the recovery (notably from 2015-2017), rapid growth in home prices widely outpaced income growth over the same period, making it difficult to save for a down payment or the often substantial upfront costs of renting. Either way, would-be household heads of virtually all ages remained entangled with other family or roommates instead of creating a household of their own.
By 2018 and 2019, the broadening economic expansion seemingly began to finally outweigh these effects, with most demographic groups — especially twenty- and thirty-somethings — beginning to get their own homes at higher rates closer to historic norms. But even after the turnaround of the past two years, young Americans especially remain much less likely than prior generations to have a place of their own. The effect is most dramatic for 20-to-34-year-olds: Only 35% of this group were household heads in 2019, down from 39.2% in 2006. In other words, only 22.72 million of the 64.5 million total individuals in this group succeeded in becoming heads of their own household.
That trend is now dead, as 2020 and the pandemic-government recession drove young people out of work and back into mom’s house.
Thing is, “household” is based on the idea of people living alone or with a “family” of some kind (marriage, long-term partner, etc.) instead of with roommates and existing family. As Zillow puts it above, it’s about “get their own homes.”
Which is fine… but thinking like that leads to thinking like this:
Home building collapsed during the Great Recession and remained at depressed levels for several years. More new homes were completed in 2019 than in any other year of the past decade, and still there were far fewer homes built last year than in any other non-recession year in the postwar era. Particularly when adjusting for population size, which is key for predicting household formation, we are now building only about 2.6 single-family homes per 1,000 Americans, compared to a historical average of almost 4. Some of the challenges holding back new construction include a shortage of buildable land and the financing to acquire it; shortages of labor, as job openings for construction workers remain unfilled; and onerous permitting processes that add time and cost to the construction process.
On the eve of the pandemic, there were promising signs of a significant rise in new home construction, with new home starts exceeding 1.5 million (annualized) each month from December 2019 to February 2020. Those numbers came crashing down in March but builder confidence has come roaring back, and now October 2020 once again saw construction begin at an annualized pace above 1.5 million homes, suggesting a robust pipeline of expanded housing supply in the near future.
New households are formed by both renters and home buyers, but the first-time home purchase in particular has gotten harder as saving for a down payment in an environment in which home price growth rapidly outpaces income growth gets increasingly difficult. Higher student debt loads and rising rent burdens contribute to savings difficulties. But even if first-time buyers managed to save the same share of their income as their parents’ generation, thanks to rapidly rising home prices and the steady increase in price-income ratios, it would still take them years longer to save an adequate amount.
The recommendation, of course, is to build more homes. Which is fine, but… I think it’s an incomplete analysis.
In theory, there can be household formation without family formation. But in reality, I think that household formation without family formation is likely to need very different housing stock, and prefer renting to owning.
I’m not going to get into depth on this, but let me just point you to this article from R Street:
So here’s a puzzle: married household homeownership went up, and not-married household homeownership went up. Combined that is all the households there are. But the overall homeownership rate went down. How is that possible and what does it mean?
It means that the mix of married versus not married households changed dramatically. Married households, with their far higher homeownership rate, fell remarkably as a percentage of all households. Not-married households, with their much lower homeownership rate, rose remarkably as a percentage of households. So although both parts saw their homeownership rise, overall, it fell. Here is the change in the mix of American households by marital status:
This change in the mix of households explains the paradoxical homeownership pattern.
So… how’s family formation doing among Gen-Z and Millennials?
The Young Folks, Just Ain’t Getting Married…
Those of us in the industry know at a gut level that family formation is the key to new homeownership. Most of the rosy predictions from 10+ years ago about how Millennials will boost housing because there are so many of them relied on the assumption that they would do family formation at roughly the same rate that everyone else before them did. Basically, you play around in your 20s, get your career going, then settle down, get married, start a family and then need more than that 1-BR apartment in downtown.
Thing is… they’re just not doing that. I wrote this post about Millennials and Family Formation back in 2011 — ten years ago. I noted then that the imbalance between male and female college matriculation rates is likely leading to fewer and later marriages.
The intervening decade has, I think, proven that to be true. This chart comes from Robslink (not mine):
Gen-Z is following the trend of Millennials, except that the pandemic has made things worse. In my Seven Predictions for 2021, I wrote about why I think first-time homebuyer numbers will drop — because dating is well-nigh impossible in COVID times:
Millennials and Zoomers might have been swiping right a lot to try and connect while locked down, but the thing about dating is that there comes a point where you kind of have to meet in person. I mean… if you don’t dance the lasha tumbai with the other person, you have no idea whether you’re compatible or not, right?
So it seems obvious that we can expect a massive drop in family formation in 2021. Unless we return to some ancient patriarchal times with arranged marriages and such, no dating = no relationships = no marriages.
Forget marriage; Gen-Z can’t even date because of the virus.
But let’s suppose that something happens (vaccine? new research from CDC? something?) in 2021 to lift all restrictions on in-person gatherings. So young singlings can get back to the minglings.
Are they really going to get married?
Economically Unattractive Men
The short answer is, probably not. Because women do not marry broke men. This isn’t just me saying it, or Kanye West rapping it, but scientific research showing it.
From Cornell University:
Fewer couples are tying the knot. Currently, barely more than half of adults in the U.S. say they are living with a spouse. In fact, according to some estimates, the marriage rate is the lowest in at least 150 years. It is the lowest share on record.
According to new research by Daniel Lichter, professor of Policy Analysis and Management, one explanation for declines in heterosexual marriage is a shortage of economically-attractive men for unmarried women to marry.
None of us are sayin’ she a gold digger, but she ain’t messin’ with no broke-broke.
The blip in household formation in 2018 and 2019 might be because of “economic freedom to set out and head a household at 2006 levels may just be within reach” as Zillow Research puts it.
Or it could be because male unemployment fell below 5% from 2016 to 2019 and was below 4% in 2018 and 2019.
That in turn made them less “economically unattractive” to single women, which led to family formation, which led to household formation, which led to more home sales and non-roommate rentals.
So… what happened in 2020? Zillow says it was unemployment:
Before the pandemic, most economists expected GenZ would enter adulthood in a strong economy with low unemployment. Now, Zillow economist Jeff Tucker says, “a prolonged setback would leave many members of GenZ delayed by years on their road to independence,” in much the same way that the millennial generation was set back by the Great Recession.
That’s true. But the trend is diverging between men and women on that front:
At the start of the lockdowns, women lost more jobs than did men. But in Q4, that trend changed… and now, the unemployment rate is lower for women than for men in the United States.
Say hello to the return of economically unattractive men for 2020 and into 2021. Note that before the lockdowns happened, women consistently had lower unemployment rates than men. That’s our economy in the 21st century: more office workers, fewer lumberjacks.
The Gap Between Elites and Non-Elite Will Widen
As I’ve been saying, we can’t understand Millennials unless we understand that there is a wide gulf between the Elite Millennials in the top 15-20% who have great jobs, advanced degrees, and family money and the Non-Elite Millennials who are everybody else. That gap will widen even more as it comes to Gen-Z who are entering the workforce in the weirdest economy we have ever seen.
That will make family formation numbers worse. But then we have to add on the bizarro-land that is dating life in the COVID world.
That in turn will have significant implications for the residential real estate industry. Many of those are not yet known, but we can certainly project them and think about them. I think we should.