The rate at which Americans formed households fell sharply during the Great Recession, with the greatest shortfall among young adults squeezed financially by the weak economy, according to an economic commentary from a Cleveland Federal Reserve official.
Tighter lending standards are further complicating the housing sector’s ability to recover by reducing access to mortgage credit, the commentary said.
“This may have increased the incentive of individuals to delay household formation in order to save for a down payment, build credit histories, or repair tarnished credit scores,” said Tim Dunne, a researcher at the Federal Reserve Bank of Cleveland, who wrote the commentary.
Although household formation has recently picked up, it’s not fast enough to make up for the shortfall that occurred over the last several years, he said.
The analysis shows the biggest dropoff in household formation occurred among adults aged 18 to 34.
An additional 2 million younger adults now live in a household headed by their parents, than did before the recession. Although these younger adults make up a relatively small portion of household heads, they account for almost three-quarters of the overall shortfall in household formation.
Choice of housing has shifted, as well, for younger adults. Prior to the recession, about one-third of individuals aged 18-34 headed households, with roughly 40% of them in their own homes. In 2010, young adults’ homeownership rate declined to 35.5%. This shift into rental housing continued into 2011 and early 2012, with little sign of any abatement.
The shortfall in household formation observed over the 2007–2010 period is an outgrowth of the weak economy and should rebound further as individuals who delayed forming households during the recession and initial recovery set out on their own, Dunne said.
Still, he concludes that the sharp decline in homeownership rates for younger adults shows little sign of recovering in the near term. When young adults start forming more households, it may have a stronger impact on the demand for rental properties than owner-occupied housing, Dunne said.