young adults today are facing larger hurdles than older generations when it comes to housing.
Based on our analysis, housing costs and labor market outcomes explain over half of the gap between the household formation rates of young adults in 2016 versus young adults in 2000.
Household formation is an important predictor of growth in the housing market. For example, when the economy was strong, young adults went on to form their own households, thereby increasing the demand for housing. However, during the recession many young adults moved back in with parents or doubled up with roommates shrinking the number of households and shrinking demand as well. To prepare for future housing demand, it is important that we track trends in household formation and project future housing demand.
We expect that as life progresses and today’s young adults age, they will add around 20 million households to the U.S. economy driving housing demand over the next decade. But, housing costs are a major factor holding back young adult household formations. Our research results indicate that 28 percent of the decline in young adult household formation is due to housing costs. If housing costs continue to rise, household formation will be suppressed, and we could see about 600,000 fewer households over the next decade.
Alternatively, we could see housing costs stabilize and the labor market improve, driving young adults’ household formations up 300,000 relative to the baseline.
There is substantial pent-up demand for household formation from today’s young adults. That demand will tax a housing market that is struggling to produce enough supply to meet demand under current conditions. Rising housing costs along with the substantial pent-up demand will add pressure to housing markets and increase the urgency for solutions that provide affordable housing.