The Long and the Short of Household Formation

One of the drivers of housing demand is the rate of new household formation, which has been well below trend in the United States in recent years. This paper studies the determinants of household formation, 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 pushed up the headship rate and household formation. Second, after stripping out the effects of the aging population and other demographic shifts, the residual behavioral component of the headship rate shows no pronounced trend. Over the long run, the rising fraction of young adults living with their parents has been roughly offset by the rising fraction of older adults living alone, rather than with spouses or partners. Finally, the short-run dynamics of headship and household formation reflect the effects of the business cycle. In particular, I find that poor labor market outcomes have played an important role in depressing the headship rate in recent years. Consequently, I project that household formation could increase substantially as the labor market recovers and the headship rate returns to trend