Goldman Sachs Comments On Housing And Missing Households

Goldman Sachs issued a report Friday on homebuilding and household formation. Analysts led by Jan Hatzius saw “three reasons for optimism.”

1. “The recent rate of reported household formation looks low relative to population growth rates.”

2. “Population aging should provide a boost to household formation because older people are more likely to live alone.”

3. An expected “rebound in the so-called “headship rates” (the share of people who head an independent household) of young people as the job market improves.”

The firm’s “analysis suggests considerable upside for homebuilding. Even stable headship rates combined with population aging would imply a rate of household formation of about 1.2 million, and the return of the “missing” households at the rate seen following previous recessions would provide a further boost. Assuming an average demolition rate of about 300,000 per year, total housing starts should eventually rise to the 1.5-1.6 million range.”

On the downside, the “post-recession drop-off in headship rates among the young is worrisome” and the report noted that “the late teens to early 30s are critical years for the formation of new households.”

“The transition to living independently appears to track the age profile of labor force participation—where most entry occurs by the mid-twenties—with a lag of a few years or more. In light of the importance of these key years, it is fair to raise doubts about the prospects for recovery later in life of the generation hit hardest by the Great Recession,” according to Hatzius.

The firm’s research indicated that “overwhelmingly young people are living with their parents” but eventually they will move out which should provide a boost to the housing market.