With fewer new households, home construction slows
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The factors hammering the construction industry are no mystery -- from high unemployment to the foreclosure crisis, but there's another factor driving down demand for new homes. The formation of new households has virtually stopped.
The weak economy is forcing families and friends to double up in homes, adding to the drag on the housing and construction industries.
Last month, Lou Domanico, a laid-off automotive specialist, packed up his belongings and left California, where he had lived for decades.
"The unemployment's higher than it's been. It's not like it used to be," he said.
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Domanico heard the job market in Minnesota was faring better. After a year and a half of unemployment, he decided he wanted a piece of the Minnesota pie.
He moved into the home of his son Anthony in Roseville. Moving here gives Domanico the chance to spend more time with family, especially around the holidays. But it also allows him to test his tolerance of the harsh Minnesota winter while searching for work.
"Some days I think I can take it, but some days I think 'How can you live out here? This is an icecube. It's just ridiculous,'" he said.
In better times, you'd expect Domanico to rent an apartment or buy a home, boosting demand for new housing. But since he's staying with family, he's not creating a new household-- and not doing the home building industry any favors.
It's a trend unfolding nationwide, as family members and friends double up in their homes. Some do it to save money, others because they lost their homes to foreclosure. If you also take into account declining immigration levels during the recession, you get the lowest household formation rate in more than 60 years.
"The change we've seen is unprecedented," said Pat Newport, an economist with the forecasting firm IHS Global Insight. He said the nation usually adds 1.3 million new households a year, but in 2009 and 2010, that number fell below 400,000, the lowest level since 1947.
In Minnesota, the state estimates that only 8,000 households were formed in 2009 and about 15,000 in 2010. That's down from the usual rate of 23,000 new households a year.
That's a huge problem for homebuilders. Newport notes that the glut of foreclosures and other homes is often cited as what is holding new home construction back. But if Americans were forming new households at the usual rate, that glut would subside, and demand for new housing would accelerate.
Newport said most home construction is in response to new household formation.
"It's the key reason why houses are built over the long run," he said.
For niche homebuilders who've been holding on during the recession, the sluggish household formation rates might not matter that much. Indeed, some homebuilders worry more about short sales, where a homeowner sells a home for less than what they owe. Builders complain that those short sales force down prices on newly built homes. Others builders argue that the appraisal process is hurting prices.
But the president of the Builders Association of Minnesota, Todd Bjerstedt believes the household formation issue is critical for his industry.
Builders often talk about how population increases will foster demand for new homes, Bjerstedt said, but if population growth doesn't give rise to more new households, builders won't get far.
"The fact is that 12 people can live in one home, and until one person gets married and forms a new household, there may not be a need for a new home," he said.
According to IHS Global Insight, national household formation rates won't return to normal until at least 2013, which is consistent with state forecasts for Minnesota. Businesses tied to new housing, like furniture stores and interior design companies, will suffer, too.
And in the meantime, what little household growth there is has moved away from the pre-recession hotspots. State demographer Tom Gillaspy said that's reflected in the decline of home construction in the exurbs, like Wright and Sherburne Counties.
"Their growth has really slowed down as fewer people are moving into the area and that has dramatically reduced the demand for housing and the growth of households in those counties," he said.
Gillaspy said it's unclear if that trend will continue. But he's fairly confident that when housing formation rates do snap back, the market for home construction will look quite different, driven in large part by aging baby boomers looking to down-size.