Yesterday, the question was posed, what is household formation anyway and why does it matter?
The general sense is that people have a kinda-sorta understand of housing formation and that they've heard it matters. Yet, for the majority of real estate practitioners, they may not use the specific terms housing formation.
Succintly put, housing formation could be boiled down to how many new buyers are coming into the market. By buyers, that could mean a single professional looking for their first condominium, that could be mean a couple who is looking for their starter home, and in today's world that could even mean one or more people coming together to co-exist and acquire their residence instead of renting.
So, it would come as no surprise that as renting has surged, household formation has declined. If you are moving back in with your parents after college either to save money or because you couldn't find a job, you are clearly not venturing into the 'real estate market' to consider buying your first residence. Given the decline in housng formations, there is less demand for new construction and there is less demand for existing housing inventory. So, if there is less demand, there is less pressure on prices. Therefore, as long as housing formation stays below historical average (based on the current United States population), there are fewer buyers out there competing for a seller's property.
So, yes, housing formation does matter. And yes, one day in the future, housing formations will increase at an increasing rate and that could cause a notable increase in housing prices and demand for new construction. Until then, we wait.
Michael Hobbs, PahRoo Appraisal & Consultancy
Twitter @Pahroo
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