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Something has put the brakes on household formation, which includes: turnover rate, signed contracts, and fees earned. Read on if you wish to see your future.

A mere 380,000 households were formed during the last 12 months, nationwide. In a “normal” economy, 1.1 million households are formed annually. 2012’s number is low even for a recovery year. An average of 550,000 households were formed each year from 2006 to 2011 in the U.S.

Why is household formation still so low? This generation’s would-be first-time homebuyers are stuck in the rivulets of this bumpy plateau recovery. Young individuals of the boomerang set have been forced to move in with their parents and delay settling down until they find employment that pays.

As household formation declines, the housing industry suffers — particularly builders. With roughly half the number of housing starts completed in 2012 than each year during the Millennium Boom, residential construction has a long way to go before it catches up with its glory days.

Once households do begin to form in reaction to strengthening jobs (likely around 2016), new households usually rent first before purchasing. Thus, single-family residential (SFR) starts will only follow growth in multi-family construction.

Related article:

The rising trend in California construction starts

first tuesday insight

Household formation is the supreme leading indicator for real estate sales. Each household formed and resulting turnover generates a sale or lease of real estate. Turnover alone is the sole event that triggers an agent’s receipt of a fee. Ignore this small item of turnover at your peril.

Like the nation, California household formation is also bogged down by poor jobs growth and stagnant wages.

Still, while the national numbers are terrible, household formations are up in California year-over-year. 62,000 new California households formed in 2011. In 2012 84,000 new households formed, a one-third increase over the prior year.

The bulk of these household formations were renters. This fact is evidenced by California’s declining homeownership rate, which is at 54% in Q2 2013. Considering speculators gobbled up nearly half of all SFR home turnovers in 2013, it’s clear that this increase in household formations is only to be celebrated tentatively — perhaps beer instead of champagne.

Expect household formation to pick up speed once employment recovers entirely, now clearly a late 2016 event. To get there we will need 18-24 months of at least 350,000 jobs added year-over-year.

At the moment, California is just 60% on its way to this prerequisite for a full recovery. In the meantime, new residential construction will continue to focus on the multi-family sector, as newly formed households necessarily turn first to rentals.

Related article:

Household formation: the next wave of housing demand

Re: Real Estate Matters: Weak housing formation is stumbling block for recovery from the Washington Post