Research

Rising household formation may buoy real estate market

The U. S. Census Bureau’s household formation report offers hope that the market is regain momentum again, says Mike Orr, director of the Center for real Estate Theory and Practice at the W. P. Carey School of Business.

2014-09-05

Activity in the greater Phoenix real estate market in June 2014 could only be described as sluggish. Sellers as well as buyers were unenthusiastic. But, the U. S. Census Bureau’s household formation report offers a flicker of hope that the market will regain momentum again, says Mike Orr, director of the Center for real Estate Theory and Practice at the W. P. Carey School of Business. [podcast] W. P. Carey: June 2014 was a depressing month if you sell real estate for a living in the greater Phoenix market. Pricing was stronger than May, and single-family houses sold for 11 percent more than last June, but supply declined again. And demand was lower than a year ago, too. But Mike Orr, director of the Center for Real Estate Theory and Practice at the W. P. Carey School of Business, said there was encouragement hidden in some of the data. The U.S. Census Bureau recently released the quarterly household formation report. It got virtually no attention in the media, but it signals a trend that should interest sellers and buyers. Michael Orr: People tend to focus on pricing, which is very much a trailing indicator to what demand and supply were like about nine months ago. I like to look at the leading indicators because it gives you a clue as to what is going to happen in the future — and household formation has been one of the early indicators of better times ahead. W. P. Carey: Orr said the data contained a pleasant surprise. It appears that the longest unfavorable trend in household formation in recent history has been broken. Orr: I was bracing myself for some more bad news, because it’s been bad news for 15, 18 months, and at least looked like an improvement. W. P. Carey: Orr said this may signal that millennials, who have been slower than previous generations to strike out on their own, are finally beginning to move out of their parents’ houses. Orr: That doesn’t necessarily mean they’re going to be buying homes because usually they start off renting. But it means more occupied housing units of one sort or another, which is generally good for the housing market. W. P. Carey: This sets off a cascade effect. Once rental inventory is used up, demand builds for new homes. Orr: I think it’s an early good sign. I don’t think we need to get too celebratory about it yet, but I think it means that 2015 will be a better year than 2014. W. P. Carey: Commenting on the market as a whole, Orr noted that the dynamics between sales volume and supply is still off. Usually when sales drop, the number of homes for sale would tend to increase and prices would drop to move the inventory. Orr: But actually supply has moved down over the last two months, so clearly sellers are lacking enthusiasm as well as buyers. W. P. Carey: Orr says there could be a number of reasons why homeowners are not putting their houses on the market: they may have decided to wait a year, or they may not have enough equity to wash the cost of selling. Orr: So there are a number of different reasons why the market is relatively quiet, and it’s not just Phoenix. The whole country is reporting relatively low numbers. W. P. Carey: For more information about the Center for real Estate Theory and Practice, see research.wpcarey.asu.edu/real-estate.

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