Shelby Webb, 22, rented her first apartment three weeks ago in Chattanooga, Tennessee, after landing a job translating ads for a Spanish-language newspaper. Now, she’s paying monthly bills for electricity, cable television and natural gas for the first time and has bought new pillows from Wal-Mart Stores Inc. (WMT)
Millions of young adults like Webb are starting to leave their parents’ homes, creating households at the fastest rate since 2007. They’re helping to provide a so-called shadow supply that may boost U.S. housing starts more than 50 percent by next year and spur consumption at a rate almost double that of the past two years.
“I love my parents but I didn’t want to live with them anymore,” said Webb, a Spanish major at the University of Tennessee, who had been forced to share their home in Milan, Tennessee, after her job search stalled last year. “It was tough. I know students across the board who were in the same boat.”
Between 750,000 and 1 million new households will be created in 2011, predict UBS Securities LLC’s Maury Harris and IHS Global Insight’s Patrick Newport. That compares with just 357,000 added in the year ended March 2010, the lowest on record, according to the Census Bureau. As employment picks up, new households are likely to rise above the past decade’s average of 1.3 million a year, according to Newport.
“The moving-back-in-with-Mom-and-Dad phenomenon is creating a growing backlog of pent-up households,” said Charles Lieberman, former head of monetary analysis at the Federal Reserve Bank of New York and now chief investment officer with Advisors Capital Management LLC in Hasbrouck Heights, New Jersey. “Improved economic conditions” will “enable these households to split up and resume living in their own residences.”
That will benefit a large group of companies, including Masco Corp. (MAS), the biggest maker of faucets and cabinets in the world; Trex Company Inc., which makes decking and railing; and USG Corp. (USG), a building-products company, said Lieberman, whose firm owns all three stocks.
New households will help boost housing starts to about 648,000 this year and close to 900,000 in 2012 from 586,800 last year, estimates Brad Hunter, chief economist and national director of consulting in Palm Beach Gardens, Florida, for research company Metrostudy. The increase reflects a shadow demand for new homes among family members who have doubled up because of economic necessity, Hunter said.
U.S. household formation in the three years ended March 2010 was about 2.3 million short of the long-term average, according to Census data. The Federal Reserve’s staff cited the “depressed rate” last November as a drag on the housing market as the central bank began $600 billion in Treasury purchases to try to accelerate growth and bring down unemployment. The Fed reaffirmed on April 27 its plan to complete the program by June.
Increasing demand for homes should help offset the so- called shadow inventory of vacant properties, Hunter said. About 1.8 million residences were delinquent or in foreclosure as of January, according to March estimates by CoreLogic Inc., a Santa Ana, California, real-estate information company.
“Household-formation rates are already tipping back upward” as job gains allow some people “to spread out now,” Hunter said. “The demographic component of housing demand is strong; it’s just the economic and psychological components that are holding things back.”
While the jobless rate has fallen to 8.8 percent in March from a post-recession high of 10.1 percent in October 2009, it’s still well above the 4.6 percent average in 2007 before the slump began.
Households form when young people move away from their parents or siblings, marriages break up into separate living quarters and immigrants find new homes. Masco, in Taylor, Michigan, and New York-based Time Warner Cable Inc. (TWC) are among companies that have said they would be helped directly by a pickup in formations.
Cable companies will benefit more than satellite TV because they sell bundled services that include voice and data, said David Joyce, an analyst in New York at Miller Tabak & Co. LLC. He has a “buy” rating on Time Warner Cable and Comcast Corp. (CMCSA) in Philadelphia.
The number of electrical-utility customers is likely to grow “a little under 1 percent this year,” with each household supporting a new power meter, said Chris Ellinghaus, an analyst in New York with Wellington Shields & Co., who has a “strong buy” rating on PNM Resources Inc. (PNM) in Albuquerque, New Mexico, and Teco Energy Inc. (TE) in Tampa, Florida, and a “buy” on NV Energy Inc. (NVE) in Las Vegas.
Rising Consumer Spending
Overall consumer spending may rise by 3.2 percent this year and 3.4 percent next year, estimates Jim O’Sullivan, chief economist at MF Global Inc. in New York. That compares with the median forecast of 2.8 percent for both years in an April 1-7 Bloomberg News survey of 59 economists, and an average of 1.8 percent in the last eight quarters, based on government data.
“Once job growth improves a bit, formations will pick up strongly,” said Mark Zandi, chief economist in West Chester, Pennsylvania, at Moody’s Analytics Inc. He says 1.25 million is a normal annual rate.
New-home renters and first-time buyers say employment and their financial prospects are key to moving out on their own. Webb got a job in January as a sales representative for the Chattanooga Times Free Press, including translating ads into Spanish for the Noticias Libres paper. Living with her parents as an adult was “definitely weird,” she said.
She is watching every cent to pay her $669 monthly rent, plus utilities. In addition to shopping at Wal-Mart, she has used classified ads to buy a used washer and dryer for $200 and bought furniture at a yard sale.
“I can’t afford to do too much decorating right now,” she said.
Anna Stokkebye, 24, bought a $155,000 two-bedroom condominium in Charlotte, North Carolina, last month after being hired full-time in January by marketing company Luquire George Andrews, where she designs websites. She had been living with her parents after graduation from the University of North Carolina at Asheville.
“I’d be lying if I said I wasn’t a little nervous” about the new financial responsibility, Stokkebye said. “I wanted to be secure that I had a steady income” before buying. “I feel very fortunate and lucky.”
Her new home is a 20-minute drive from her parents, who she said she enjoyed living with on a temporary basis. “They are thrilled I am this close.”
Some adults who want to move aren’t able to yet, which contributes to the shadow demand. Jesse Hipp, 24, who graduated from the University of Arkansas in 2009, still lives with his parents in Fayetteville, Arkansas, while he works an overnight- shift with varying hours at discount retailer Target Corp. (TGT) He would like to find a job that makes use of his major in international relations and his ability to speak Chinese.
“On the personal ego thing, you don’t want to be 24 and living in your parents’ house,” said Hipp, adding he doesn’t want to be “a burden” because they “are struggling to get by as it is, and they are having to support another adult.”
About 20 million adult children live with their parents, and most are eager to move, said demographic-trends analyst Peter Francese in Exeter, New Hampshire, of advertising agency Ogilvy & Mather.
‘Great Big L’
“In America, the extended family is a very unstable household,” he said. “Most guys who live at home beyond some young age walk around with a great big L on their forehead. It is just not acceptable. As soon as these young adults get a job and keep it for some reasonable period, they are gone. As more young people feel they will be able to keep a job, bingo, they are gone.”
Some households may be created by people who have delayed divorces for economic reasons, Francese said.
“There is a pent-up demand for divorces,” which are usually “a matter of convenience or discretion,” said Joseph Cordell, principal partner of St. Louis-based law firm Cordell & Cordell, which specializes in representing men in domestic litigation. His firm’s customer count rose by about 20 percent in the first quarter, and that is likely to continue in the next few quarters, he said.
Divorce and Recession
The number of divorces dropped to 6.8 per 1,000 people in 2009 from 7.4 in 2006 prior to the recession, according to the National Center for Health Statistics in Hyattsville, Maryland. In a 2011 survey by the National Marriage Project at the University of Virginia, 38 percent of people considering a divorce or separation said the recession caused them to put aside their plans.
Between now and 2020, as many as 13.8 million new households likely will be formed, with the rate of immigration a “key wild card,” according to a September report by Harvard University’s Joint Center for Housing Studies. Masco Chief Executive Officer Timothy Wadhams is more optimistic, saying at an investor conference in March that the total may be 15 million by 2020.
“At some point, housing starts will likely take off in a big way,” Newport said. “I just do not think that Americans will settle for living in more crowded homes.”
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