The Long and the Short of Household Formation

40 Pages Posted: 25 May 2013

See all articles by Andrew Paciorek

Andrew Paciorek

Board of Governors of the Federal Reserve System

Multiple version iconThere are 2 versions of this paper

Date Written: April 1, 2013

Abstract

One of the drivers of housing demand is the rate of new household formation, which has been well below trend in recent years, leading to persistent weakness in the housing market. This paper studies the determinants of household formation in the United States, including demographic and behavioral changes, and how they evolve over the long and short runs. There are three main findings: First, because older adults tend to live in smaller households, the aging of the U.S. population over the past 30 years has reduced the average household size, or equivalently, pushed up the headship rate and household formation. Second, after stripping out the effects of the aging population, the residual behavioral component of the headship rate has declined over time, thanks largely to rising housing costs. This shift has reduced household formation, all else equal. Finally, the short-run dynamics of headship and household formation reflect the effects of the business cycle. In particu lar, I find that poor labor market outcomes have played an important role in depressing the headship rate in recent years. Consequently, household formation could increase substantially as the labor market recovers and the headship rate returns to trend.

Keywords: Household formation, headship rate, housing demand

JEL Classification: D1, R2

Suggested Citation

Paciorek, Andrew, The Long and the Short of Household Formation (April 1, 2013). FEDS Working Paper No. 2013-26, Available at SSRN: https://ssrn.com/abstract=2269052 or http://dx.doi.org/10.2139/ssrn.2269052

Andrew Paciorek (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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United States

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