Household Formation Down, Especially Among Young Adults, Negatively Impacting Housing: Cleveland Fed Researcher

Americans set up households at a much slower clip during the Great Recession, with the biggest dropoff occurring among young adults, ages 18 to 34. This slowing in household formation, a reflection of the overall weak economy, has reduced housing demand, negatively impacting the housing market, says Tim Dunne, a researcher at the Federal Reserve Bank of Cleveland.

An additional 2 million younger adults now live in a household headed by their parents. 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.  

Recessionary forces, such as diminished employment prospects, typically reduce the likelihood of new household formation. But the most recent recession and its bursting housing bubble added another complication -- tightening lending standards, which reduced access to mortgage credit for a range of borrowers. “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,” Dunne says.

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 percent of them in their own homes. In 2010, young adults' home ownership rate declined to 35.5 percent. This shift into rental housing continued into 2011 and early 2012, with little sign of any abatement.

Dunne concludes that the sharp decline in home ownership rates for younger adults shows little sign of recovering in the near term, suggesting that when young adults start forming more households, it may have a stronger impact on the demand for rental properties than owner-occupied housing.

Read: Household Formation and the Great Recession

Also check out research, data, and news from the Cleveland Fed on Facebook. Or follow us on Twitter @ClevelandFed.