Household Formation, Multigenerational Households and Millennials

When talking about real estate, whether it’s commercial property, rental property or residential, we don’t always think of it from a demographic perspective. Demographics and housing trends are exceptionally important.  They help us identify what the current market is doing and help us project the future market trends.  Helping investors stay ahead of the cycle.

Household formation

The number one statistic that is used to predict real estate growth or shrinkage is household formation. As you can see by the chart below, household formation was at a peak in late 2004 through mid-2005 and at its lowest at the end of 2008. Household formation is the reflection of how many new people are creating households. For example: in 2004 when the economy was strong, say 4 young people graduated from college and they all went and rented one-bedroom apartments, they just formed four new households. This is the creation of household formation. When the recession hit, those same four young people found that they could no longer afford their one-bedroom apartment and chose to group together and get one house with four bedrooms, forming one household. Four households became one household, creating household shrinkage.

One of the other changes that we’re seeing in household formation is the change from a traditional family structure to a multi-generational structure. There is a record number of Americans living in multi-generational households. A record 60.6 million!

Multi-generational households have almost doubled in the last 65 years.  This is an important trend to note for real estate investors such as fix & flippers and builders. It’s not simply larger houses that these multi-generational households are looking for, its co-living options such as: in-laws quarters, guesthouses and above garage apartments just to name a few.

The next demographic to consider when looking at household formation has to be the millennial’s. There are about 80 million young adults that were born between 1978 and 1995. That represents approximately 25% of the population. Not only do millennial’s make up the largest household formation base, they also have different wants, needs and expectations than their baby booming parents. Let’s look at a few things that make them unique:

• don’t want to be tied down

• they’d rather not live in suburbia

• they want to live near work and not commute

• they want to live near where they “play”

• many telecommute, full or part-time

• they are delaying marriage and family until later

• technology is like air to them

• many don’t own or want to own cars

• travel and hobbies are important to them

Another big difference with millennial’s is they feel they have the tools to do the research themselves. Value is very important to them and they want to make sure they are getting the best value. What they consider value does not always correlate directly to low prices.  When they do move into the buying phase, not only will they look for value they also don’t want to be house poor.

Our job as real estate investors is to stay in front of the cycle. I personally see the next 5 to 10 years as a great opportunity to take advantage of the multi-generational households.

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