As household formation mends and grows, the housing recovery will benefit overall, but the rental industry is expected to come out as the biggest winner, according to a report from Capital Economics.
“[W]ith the overwhelming majority of newly forming households over the next few years set to rent rather than own their home, the rental sector will be the disproportionate beneficiary,” wrote economist Paul Diggle in the report.
Not only has household formation picked up again after dropping off in 2008 and 2010, but Capital Economics added, “there are good reasons to expect household formation to keep getting stronger.”
For one, the reported noted the drop in household formation in previous years “left a shortfall of about 1.2m households relative to trend levels,” leaving the these potential households “itching to go it alone.”
The report also explained there is a relationship between household formation and GDP growth, which rose to 2.7 percent in the third quarter.
The analytics firm expects household formation to soon meet or slightly exceed the rate of 1.1 million per year.
Freddie Mac recently released a forecast and projected net growth of 1.20 to 1.25 million households in 2013.
While the newly formed households will absorb demand for housing and homebuilding, Capital Economics says that a closer look at these newly forming households likely suggests the “rental sector will see the biggest boost from rebounding household formation.”
“Nearly all newly forming households in the past five years have been renters,” Diggle stated.
Capital Economics explained the headship rate of the 25-34 age group increased to 48.2 percent from 47.1 percent this year, and 59 percent of this group are renters.
However, the headship rate of the 25- to 34-year-olds is still below the historical level of about 49 percent. Among 18- to 24-year-olds, 77 percent are renters, but the group’s headship rate is yet to improve.
But, as these headship rates reach normal levels, household formation will continue to see young households, who are more likely to be renters, lead the way.
Thus, while the rental rate has stabilized at 34.5 percent for two quarters now, Capital Economics believes it could rise even further.