With all the things that go into real estate people often forget that supply and demand is the basic driver of the market. Everything else represents components that impact supply and demand.
This is why paying attention to trends in supply and demand is so important. We will discuss it in this post, specifically the growing number of households in the coming years.
Growing Housing Formation to Drive Real Estate Demand
Recently I have been reading some research in a book titled “Big Shifts Ahead.” One piece of data that especially caught my eye was the expected growth in household formation, to the tune of 12.5 million.
This growth was expected to take place from 2016 till 2025. Looking at the past few years this trend is certainly playing out. Supply has been restricted for some time now, continuing to drive prices higher.
An additional 12.5 million households over that period of time would represent an 86% increase compared to the 10 year prior. That is worth taking note of.
The Drivers of This Trend
Without going too deep into why this is occurring, the short version is household formation from 2006 to 2015 was delayed for many by the great recession and dropped drastically.
Those people are now forming households late, coupled with people born in the 1990s (which happens to be one of the largest populations) creates a huge surge in housing demand.
What is a household formation?
Household formation doesn’t just mean when someone buys a home. It is when someone creates a new household. If a person is living with their parents and then rents an apartment that would form a new household, for example.
That being said, demand for homes and for rentals should continue to see growth as long as the economy can keep it together, possibly even longer.
Many expect a jump in supply over the next couple years from a surge in foreclosures. This may or may not occur depending on how much support the government continues to provide. If it does happen though, will the current boom in household formation offset it?
That really is the big question we all should ponder.