Despite ongoing concerns about the delay in household formation by younger buyers, demographically speaking things may be about to turn a corner.

The decline in the share of young adults living with their parents should provide a boost to household formation over the next few years, according to a client note from Capital Economics.

This is an upside risk to their forecasts for sales and housing demand and, perhaps, homebuilding, but it is unlikely to trigger a sharp rise in prices, the note says.

The subdued rate of household formation has been a drag on the housing recovery in recent years.

Most measures suggest that, since 2008, the number of new households forming each year has been unusually low – little more than half a million.

But in the latest Homeownership & Vacancy Survey, the Census Bureau estimated that household formation surged to 1.7 million in 2014, from 400,000 the previous year.

“Admittedly, the annual measures of household formation have always been volatile and it’s difficult to know how much weight to place on the latest reading,” says Ed Stansfield, chief property economist for Capital Economics. “But such a strong rebound could be a sign that housing demand is set to receive a significant boost in the coming years.”

An unusual number of 18-34 year olds still live with their parents – an amount that grew from 27% pre-housing crash to 31% in 2013.

“There are signs that this trend is starting to reverse, however. The US economy is now growing strongly, with real incomes rising rapidly and mortgage credit conditions loosening,” Stansfield says. “That means more young adults will have the means to strike out on their own. So, if this pent-up demand for housing is released over the next few years, will household formation surge, putting significant upward pressure on both homebuilding and house prices?”

He notes that if the share of 18-34 year olds living with their parents falls back to pre-recession levels over the next five years, this could result in an additional 400,000 young adults leaving home each year.

This would provide a significant boost to household formation and to housing demand.

“…(A) normalization in the share of young adults living with their parents looks set to provide a boost to household formation, underpinning the recovery in housing starts. But unless it is also accompanied by a marked loosening in lending criteria it is unlikely to trigger a new house price boom, as house price growth will be constrained by income growth,” he says.  

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