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The Tide of Households to Come

If you own affordable property that can be purchased by entry-level buyers, you are in an ideal position to profit from the real estate tide to come. 

New data from The Joint Center for Housing Studies shows that household formation has slowed dramatically from 1.2 to 1.4 million annually between 2000 and 2004, to 1.0 million or less between 2005 and 2009. See:

Household formation is dependent on the economy and consumer confidence. When people have jobs, they have the confidence to leave their parents’ home, marry or live alone or with someone else. They rent apartments and buy homes.

Immigrants also form new households. When there are jobs, immigration increases to the United States.

But in a recession, people tend to “double-up.” They stay at home, combine resources, take in roommates or renters, and tend to put off household formation. Immigrants, legal and illegal also stay home, which largely explains the household formation decline between 2005 and 2009.

While information isn’t yet available for 2010, it’s likely household formation remains flat.

With six years of household formation declines, it’s also likely that household formation has overcorrected, and that it could rise again on favorable economic news.

Here are a few reasons why affordable housing is a good investment for the household boom to come:

Affordability. The housing market suffered price declines during the recession, allowing affordability to rise. When it becomes affordable to buy a home, people generally buy for the appreciation and tax benefits.

Household growth. Future household growth is difficult to predict, but the Harvard researchers say that if immigration is half the Census Bureau’s estimates, household growth between 2010 and 2020 should be approximately 12.5 million or a little over 1.25 million annually.  If it reaches the Census Bureau’s maximum estimate, household growth could be 14.8 million or 1.48 million annually.

First-generation population. Among the reasons is that immigrants and their native-born children have “swelled the ranks of the baby-bust and echo-boom generations,” so that “each now rivals the baby-boom generation in size.

Mobility rates. As we recover from the Great Recession, mobility rates may also return after falling 12.6% by 2009. Homeowners tended to stay put, rather than move up, causing housing exchanges to stagnate.  Once the economy improves, people will tend to “move house” as they say in England.

Wealth decline. Median household income is lower today than a decade before, with the youngest households taking the biggest “last-hired, first-fired” hits.  “Housing demand must therefore build upon a lower real income base than a decade ago. Falling home prices, lower interest rates, and slower increases in rents may, however, blunt some of the impact of income losses over the next year or two,” says the Center.

Echo-boomers.  The echo-boom generation (born after 1980) is already larger than the 78-million strong baby boomers (born 1946-1960.), and with immigration will “swell to 92.9 million by 2025. If immigration remains sluggish, the generation could still reach 86.5 million.

“This highly diverse generation will give demand for apartments and smaller starter homes a lift
over the next 15 years,” says the Center.

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