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How Economic Crises Impact the Rate of New Households

A new study from the University of Southern California Lusk Center for Real Estate concludes that new household formation, a key driver of housing demand, has recovered after the job losses that accompanied the recession.

While it was known that negative economic shocks such as major drops in employment reduce household formations, little was known about how long these declines would persist. The study, which is authored by Lusk Center director of research Gary Painter and doctoral candidate Jung Hyun Choi, finds that household formations consistently fall in the first quarter after an increase in unemployment, but return to their previous levels within about three years. This is true regardless of whether jobs have returned.

“This shows us that even a permanent increase in the unemployment rate will not have a permanent impact on housing formation,” Painter says. “As a result, policymakers and industry practitioners have a new level of predictability when it comes to how economic crises impact the rate of new households.”

According to the researchers, household formations fell to nearly zero from 2008-2010. The formation rate then played catch up for about three years and, even though jobs have not fully returned, household formations have now recovered to their pre-recession levels of 1 million per year.

“The freeze in formations is over and people are again moving out and forming households. This means that real estate professionals and policy makers should not keep waiting for pent-up demand” Painter added. “So while a number of factors will continue to influence the housing recovery, household formation is no longer one of them.”

The study reviewed quarterly data from 1975-2011 and found that three-year recoveries in household formation were typical for all major employment shocks to the economy in the last 30 years. Click here to download the full paper.

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