The stall out in household formation is one of maybe half a dozen primary factors hurting housing sales.
Dr. HousingBubble is always on the mark, and he goes deep into the problem.
In most open markets a steady stream of demand will usually trigger a counter response with supply. This of course assumes open channels and healthy competition. Unfortunately this is not the case with heavily subsidized and often politically motivated real estate. The overall theme of housing in the U.S. recently has been one where more Americans are simply being priced out of the market and millions are becoming renters because of financial necessity.
There is a simple formula when thinking of true household formation as it pertains to real estate: in a perfectly balanced market you would have home supply in new completions plus excess vacant properties for sale plus manufactured homes being in balance with housing demand in household formation plus demolitions plus second home purchases. Of course this assumes that builders can adequately predict future demand which they cannot.
But builders are betting on many future households being renters and they are putting their money in the multi-family housing market. You would think with the big spike in prices in 2013 that builders would be rushing out to build homes to meet this demand. Yet this demand is coming from a fickle group of investors looking for deals rather than a “home” which is typical for most traditional buyers and prices are being pushed up on very low inventory. What happens if household formation doesn’t get back on track?
Read the rest here from the doctor.