FED: Household Formation At Lowest Levels Ever Recorded In U.S.

According to Federal Reserve economists, the rate of new household formation has plummeted to it’s lowest level since records began being kept at the end of WWII. Down some 59% from the historical trend, we are seeing around 550,000 new households formed each year, as opposed to the average of 1.35 million per year through 2006. This is nearly a 2/3 drop in new household formations, and is a big wake-up call for home builders, real estate licensees and real estate investors. Read the report here.

Household formations include any type of “new” housing. If someone leaves home, goes out and rents an apartment, that is a “new household”. This runs the gamut of residential real estate from apartments to single family houses. As such, the economy continues to linger in it’s funk, due to a slow housing market that is not creating new jobs at the pace needed to sustain an economic recovery.


© cfarmer - Fotolia.com

© cfarmer – Fotolia.com

So what is going on here? There has been endless speculation about the reasons for this trend, most of them wrong. I think one of the biggest barriers to getting to the bottom of this problem is the ongoing fact that government and special interests are intent on making things look better than they are, by manipulating statistical data to give the impression that the housing market is actually getting better.

Month after month the National Association of Realtors releases data on home sales numbers. This data is merely sales statistics based on MLS data and does nothing to identify underlying fundamental issues within the housing sector. If there is anyone who does not want to see any bad news for the housing market, it’s the NAR. Their job is to figure out how to constantly convince people that “now” is the time to buy – no matter when “now” is. As a former member of the NAR myself, I know that they are the kings of data spinners.  Just note this quote from their current report:

“For all of 2013, there were 5.09 million sales, which is 9.1 percent higher than 2012. It was the strongest performance since 2006 when sales reached an unsustainably high 6.48 million at the close of the housing boom.”

I just LOVE that part about “the close of the housing boom.”  And you probably did not even realize that the problem was simply that there were too many sales in 2006, so we did not have a “bust” mind you, just a simple reallocation of home sales down to a more shall we say, “sustainable” level. Hogwash. Just plain unadulterated hogwash.

Does it strike you as odd that household formations are at their lowest recorded levels since record keeping began, but home prices and sales activity are comparable to 2006 – the PEAK of the housing boom?  Perhaps this data from the NAR is useful. It must be signaling that another crash in home sales and prices could be right around the corner, as it was in 2006. But in their world, this is all good news until it isn’t. Never mind the fundamentals, let’s just party like it’s 2006.

And the Feds – both the Federal Reserve variety, as well as the Federal Government have been doing all they can to stoke a housing recovery. While the Federal Reserve has been shoveling trillions of dollars into the housing market, the government is quietly expanding loan criteria on government insured programs that exceed even some of the subprime loans we saw during the housing boom. For example this article from Rob Chrisman on Mortgage News Daily details a new program that includes 55%  debt-to-income ratios for streamline FHA loans, along with a new 100% cash out loan for VA with a 620 FICO score.  At the same time, Bank of America, Wells Fargo and AIG are all cutting mortgage staff considerably, due to lack of volume and word has it that Wells is being pressured to do more subprime loans because overall volume is down more than 50%.

The real bottom line here is that fundamentally job growth is stagnant and we have an enormous wave of baby boomers who have moved past their peak spending years. In short, the demand for housing is changing. Real incomes are down, inflation is taking a toll on housing affordability, and aging boomers who drove growth for years, are cutting back on spending. New job growth needs to increase by more than 200,000 per MONTH over and above current levels just to keep pace with the number of retirees leaving the job market and cutting back on their spending. No job growth equals slow to no real growth in the housing industry.

This is not a healthy housing market that is showing signs of real recovery, it’s another inflated housing market where prices and sales have been driven by mega real estate investment companies with access to cheap money, who have bought up as much inventory as they possibly could at rock bottom prices. They have essentially driven up the paper value of homes, and obscured the serious fundamental issues that housing is facing. But this slow demand for housing may come back to bite the mega investors. I believe we are already seeing early signs of a slow down in mega home buying activity.  It’s a bit early to tell, and there are always seasonal slow downs in winter, but digging down into the details it appears that overall buyer demand has been trending downward for several months now in spite of the appearance of rising prices. 

One of the clearest signs of trouble is when there is a total disconnect between underlying fundamentals and rising home prices. And I am certainly seeing that disconnect as we prepare to enter the 2014 selling season.

Small investors who make their living buying, rehabbing, renting and reselling homes would do well to keep a close eye on trends as we approach the spring of 2014. My sense is that the “close of the current boom” (as the NAR would say), could be coming soon. Buying now, at peak market prices could prove to be unwise unless one is buying at 50 cents on the dollar of real value, not inflated prices. The fundamentals simply are not supporting a healthy retail housing recovery.
Donna S. Robinson is a 18 year veteran of the real estate industry, with experience as a rehabber, wholesaler, investment analyst, rental property manager, owner, licensed agent and residential real estate market expert. She coaches real estate investors to improve cash flows while reducing risk. She has authored numerous books and courses on real estate market fundamentals and investing strategies. Follow her on twitter @donnaconsults  Watch her videos and read more articles and contact her about coaching services on her website.