Household Formation

By: J. David Chapman/February 9, 2023

Back in the day, I owned a traditional brokerage that did a lot of residential transactions as well as residential rentals. At the same time, my wife and I taught marriage classes at church called His Needs, Her Needs. I spent much of my free time trying to help young people strengthen their marriages and spent my work time making accommodations for failed marriages. With half of the marriages failing, many of those looking for rentals and homes were doing so because of a changing formation of their household, specifically divorce.

Divorce creates a very inefficient housing model, with the typical husband and wife with two kids who lived in a three-bed, two-bath home now living in two three-bed homes to accommodate for joint custody of the children. On the other hand, marriage typically joins two people with one-bedroom homes or apartments and creates a more efficient model by requiring only one home. This “household formation” has had a huge impact on the real estate market in the U.S.

At the beginning of the pandemic, household formation declined. People stopped moving, marrying and getting on with their lives. They hit pause, based on the lack of confidence that stemmed from the fear that an economic contraction was going to occur. Young people moved in with parents or stayed living with parents, again having an effect on household formation.

Household formation is the number of new households that will be formed over the long term. This is based on projections of populations by age, marriage rates, divorce rates, and number of children per household. Household formation is the underlying driver of long-term demand for new housing and thus new home construction.

We try to correlate variables to household formation so we can predict models for needed single-family and multifamily housing. For instance, when the unemployment rate decreases, we expect to see more single-person households at the upper-income levels of multifamily rentals. This change in renter cohort is due, in part, to increases in average age; older people, unmarried, not being interested in roommates, and choosing to live alone.

I would encourage the real estate investment community to start considering trending household formation and making strategic changes in portfolio types based on long-term positive demographic attributes. I also would encourage city leadership to continuously monitor, by assessment, real estate housing needs of their communities.

J. David Chapman is a professor of finance and real estate at the University of Central Oklahoma (jchapman7@uco.edu).