Tight rental market holding back household formation

The latest data on US households is out (through Q2) and the story remains the same. Household formation has stalled. US population is growing at about 0.7% per year while households grew at an annualized rate of 0.34% over the past two years.

Source: US Census

Part of the problem is weak residential construction spending which is keeping the supply of rental housing relatively tight.

Construction spending as % of GDP (units: 20 means 2% of GDP)

As a result, rents are now rising at over 1% per year faster than wages, pricing many potential households out of the market. The chart below shows the rent component of the CPI minus the year-over-year average hourly wage growth in the US.

The longer this goes on, the more out of reach affordable rental housing will become for new households. As discussed before (see post), this is going to become a major issue for the US in years to come.

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Rental home shortage is America's next housing crisis

The US is facing a new housing crisis. No, it has nothing to do with subprime mortgages or bloated home equity balances. This time the nation is dealing with shortages of rental housing, a problem that will become increasingly acute in years to come and may result in a material drag on economic growth.

Americans are simply not building enough homes to accommodate the population's needs. The number of housing units completed per capita in the United States remains a fraction of historical averages. The slight improvements from the lows of 2011 have barely scratched the surface.

Similarly, in spite of recent increases, residential construction spending as a fraction of the GDP remains at the lowest levels than at any time since WWII.

At the same time demand has been on the rise. As an indicator, the chart below shows Google search frequency for rent related phrases.

Apartments & Residential Rentals - related searches (Source: Google Insights)

The myth out there is that this problem is somehow limited to some of the coastal areas of the United States - NY, Florida, California, etc. It is not. Just take a look at the rental vacancy trend in the Midwest.

The last point represents Q1, 2014

This shortage is of course translating into rising costs of shelter across the country. The overall shelter CPI is headed toward 3% and the rate of just rental cost increases is even higher. It is materially above the overall CPI rate and expected to rise further.

This trend, combined with massive amounts of student debt (see discussion) will be increasingly taking a bite out of consumer spending. The percentage of "housing cost burdened" households (those who spend more than 30% of their income on shelter) has been rising rapidly.

JCHS (Harvard) - The recent deterioration in rental affordability comes after a decade of lost ground. The share of cost-burdened renters increased by a stunning 12 percentage points between 2000 and 2010, the largest jump in any decade dating back at least to 1960. The cumulative increase in the incidence of housing cost burdens is astounding. In 1960, about one in four renters paid more than 30 percent of income for housing. Today, one in two are cost burdened. Even in 1980, following two decades of worsening affordability, the cost-burdened share of renters was just above a third.

Given such demand, why does residential construction remain so tepid? Since 2008 the acquisition, development and construction (AD&C) lending has been too restrictive to accommodate the rising demand. That in turn has led to insufficient numbers of developed lots for construction.

US News: - According to a recent National Association of Home Builders industry survey, 59 percent of builders reported the supply of developed lots on their areas was low or very low. This is a significant increase from a similar survey undertaken in September 2012. In fact, the 59 percent response is the highest rate recorded since 1997, when this first survey question was first posed.

Other reasons include highly restrictive zoning rules, as existing homeowners limit new construction in order to boost their property prices. Whatever the case, residential construction is running at half the level of longer term housing demand. And while the nation can get by for now, consider the situation 5-10 years down the road.

Economists, politicians, and the media continue to focus on slow home sales as an indication of weak housing markets. But they are simply "fighting the last war". The looming crisis is not about how often homes change hands, but about the shortage of rentals and the rising cost of shelter that the new generations of Americans will increasingly face.

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US housing sector stalling

The US housing recovery continues to face headwinds. Here are the key factors contributing to weakness in the sector.

1. We've had a sharp decline in housing affordability due to higher prices and higher mortgage rates. The decline in mortgage rates recently should help somewhat, but buyers remain cautious.

Source: Deutsche Bank

2. Banks have tightened lending standards. The important trend here is the tightening in the "nontraditional" mortgages (ignore the "subprime" component - it's not a meaningful portion of the market). If you don't fit into the traditional mortgage "box", getting a loan is now more difficult.

Senior Loan Officer Opinion Survey on Bank Lending Practices (Federal Reserve Board)

3. Household formations have stalled. It will be difficult to get the demand going until growth in households picks up again.

Source: U.S. Census Bureau

This weakness in housing is already reflected in the equity markets as shares of homebuilders underperform.

Orange=S&P500 ETF, Blue=Homebuilder index ETF (source: Ycharts)

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Weak US household formation pressuring housing markets

Housing remains a weak spot in what otherwise looks like a fairly broad improvement across the US economy. The new home sales report today for example came in materially below expectations.

Signs of this soft patch in housing were already visible over a month ago when lumber futures experienced a significant decline (see chart). Home prices have risen quickly over the past couple of years, and that combined with higher mortgage rates creates a bit of a sticker shock for many potential buyers. Furthermore builders continue to complain about construction costs and tight credit. The biggest issue however remains household formation. As of the end of last year for example, the number of American households was not growing at all (see chart). This is likely due to record low marriage rates as well as a slew of other factors. Whatever the reason, household formation needs to stabilize before we see stronger results in the US housing market.

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Residential construction weakness - looking beyond the cold weather

Recently we've had a visible slowdown in housing starts in the US, which has largely been attributed to the weather (see chart).

USA Today: - Housing starts fell sharply in January for the second straight month as cold and stormy weather continued to batter the recovering housing market.

Starts of single-family houses and apartments fell 16% to a seasonally adjusted annual rate of 880,000 last month after declining dramatically in December, the Commerce Department said Wednesday. Extreme winter weather is largely blamed for both poor showings after starts jumped to their highest level in a year in November.

But is there more to the sluggish construction data than freezing temperatures? If weather was the only factor, markets would be expecting a strong recovery in construction later in the year.  But as this chart shows, weakness in July lumber futures points to rather subdued expectations for home construction this summer.

Some point to higher mortgage rates generating a drag on the overall housing market. The "taper-driven" spike in rates has definitely been unusually sharp, but mortgage rates have now stabilized below 4.5% - still quite low by historical standards.

To understand the non-weather factors of the sudden slump in private construction, we want to go back to one of the key sources of improvements in housing back in 2012. It was the boost in household formation (see post) that kick-started the housing market. Now, to many economists' surprise, the number of households has stopped growing in recent months - detracting materially from housing demand.

Source: US Census Bureau

To be sure, home construction should improve in the coming years simply because of demographics. Home building in the US simply hasn't kept up with population growth in recent years. But the big improvements will only take place once we see substantial gains in household formation.

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Two potential headwinds for the US housing market

While the US housing market remains relatively robust, it is likely to face a couple of headwinds going forward. One is the lower affordability index, which is declining due to higher prices and higher mortgage rates (see discussion). On a year-over-year basis the declines have been quite steep.

The second trend that will detract from demand for homes is the recent slowdown in net household formation. The chart below shows the year-over-year change in total number of US households. This decline in the "formation rate" is likely to be transient (simply because of population growth), but it is not helpful for the housing market nevertheless.

Estimate by the United States Census Bureau

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From our sponsor:

For many Americans rising home prices are no cause for celebration

Economists and the markets have been cheering the jump in housing prices and improving construction statistics. But for many Americans rising demand and higher house prices bring more bad news. Based on the latest data (report below) from the Joint Center for Housing Studies, Harvard University (JCHS), here are some sad facts about the housing situation in the US.

1. The number of homes for sale is still near record lows. That is driving up costs and quickly pricing many households out of the market.

2. The US actually has a large number of vacant homes that are not making it into the market. Vacant homes are often in areas with few job opportunities, making it impossible to renovate, sell, or rent.  Many are in places like Detroit and simply will never be sold.

Source: JCHS

3. We are seeing the confluence of tight housing conditions and weak household incomes. As JCHS points out "most types of households have seen their real incomes decline over the past decade". This is particularly true for growing households.

Source: JCHS

4. As a result, "the total number of households paying more than half their incomes for housing soared by 6.7 million from 2001 to 2011, a jump of 49 percent". Note that this is a problem for both homeowners and renters.

Source: JCHS

5. Housing shortages (discussed here) and rapid renter household growth are driving up rents. At the same time, millions of federal rental subsidies for low income renters are set to expire in the next decade.

Source: JCHS

6. On top of all this is the fact that households are now forming at a rate of about a million per year. The market is demanding a million new residential units each year. Unless construction can keep up and prices decline or incomes rise (neither seems likely right now), this trend will drive up the number of households with "housing cost burdens" (already over 40 million; see #4 above) - for both homeowners and renters.

JCHS housing report

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First signs of rate-driven weakness in the housing sector

Today Citi and some other banks quoted the 30-year conforming mortgage rate at 4.625%. Others are quoting the rate even higher (see national averages below).

Source: Mortgage News Daily 

Once again, it's a low rate by historical standards, making many economists think that the housing sector is unlikely to be impacted. The markets say otherwise. Over the past three months, the Philadelphia Housing Index has underperformed the S&P500 by 9%.

Source: Ycharts

For the first time in a while, US homebuilders are becoming concerned. While sales expectations continue to be strong (given demographics-driven housing demand), the ISI Homebuilders Sales Survey turned down in recent weeks.

Source: The ISI Group

These higher rates may already be showing up in the employment numbers. In spite of the strong US employment report today, on a seasonally adjusted basis almost no new jobs have been created in residential construction in June (chart below).

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US household formation has stabilized

According to the US Census Bureau, about 3.5 million households have been created over the past couple of years. As a comparison, only 755K were created in the previous two years (08-10) - with the recession hampering household formation. The following chart shows the ratio of the number of households (using the revised household number for 2011) to the US population over time. The ratio has stabilized, which is one of the reasons that demand for housing has improved recently.

Source: US Census Bureau

With pent up demand diminishing after 2013 however, housing price appreciation should revert back to the growth in household incomes (as discussed here). That means that going forward price increases on average should moderate.

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Pent-up demand for new homes is boosting construction, but another market will see growth as well

As discussed earlier (see post), household formation and historically low new home inventory (see post) is stimulating construction of new homes in the US. The large shadow inventory, which many view as holding back resi construction, is simply converting some portion of homeowners into renters. But for every renter there is an owner - and there are just not enough existing homes for sale. That's why US housing starts hit a new post-recession high.

Source: Econoday

Pent-up demand for construction however is not the only market stimulated by adjustments in demographics. Demand is growing for home renovation as well. Since very few new homes have been built recently, the median age of US homes is rising, requiring additional maintenance.

Average age of home in the US (source: Merrill Lynch)

Furthermore, as homes change hands to younger owners, the need for renovation increases. That's because older homeowners spend half the national average on monthly maintenance.

Spending on monthly maintenance (source: Merrill Lynch)

ML: - Because the elderly (who own 27% of homes) have been in their homes for much longer than the rest of the population (24 years vs < 10 years overall), they tend to own somewhat older homes. However, they spend less to maintain them than other groups and only half the national average. Updating and maintenance of elderly-owned homes will help drive remodeling demand for years to come.

Other factors will also contribute to increasing demand for home renovation, such as the need to make homes more energy efficient. A number of large firms (we all know who they are) will be the direct beneficiaries of this growth market, but the trend should also benefit a variety of small businesses across the country.

Household formation to boost housing starts - assuming government funding stays intact

Goldman is projecting a rapid rise in household formations starting next year, with households forming at a rate of 1.2mm per year and even higher.

Source: GS

As one would expect all these new households, whether buyers or renters, should generate demand for additional housing. Subsequently, US housing starts forecast from GS shows an increase in the next few years (though still below the rates we saw before the onset of the housing recession).

Source: GS

Goldman is not unique in this forecast. The ISI Group for example shows an even more aggressive near-term forecast for housing starts.

Source: ISI Group

It is important to note that these forecasts all assume that government funding of mortgages stays intact. Without the US government support for Fannie Mae, Freddie Mac, and particularly the FHA (see discussion), even the sharp rise in household formation may not by itself lift housing starts. The necessity for taxpayer support of these agencies will continue going forward. There may even be a need for an injection of capital into the FHA, which is currently broke (h/t Greg Merrill).

AEI: - In September, 17.3 percent of all Federal Housing Administration (FHA) loans were delinquent [see discussion on the topic], up from 16.35 percent in August 2012 and 16.78 percent in September 2011. Total delinquencies increased by 77,000 over August, the largest one-month increase since FHA Watch began tracking monthly delinquencies in September 2011.

The September estimate of the FHA’s generally accepted accounting principles (GAAP) net worth is –$28.3 billion, down from –$16.3 billion and –$26.3 billion in September 2011 and August 2012, respectively. The capital shortfall stands at $48 billion (using a 2 percent capital ratio) and $67 billion (using a 4 percent capital ratio). The Denial Dial was reset to −2.61 percent, eclipsing the previous low set in August 2012. The FHA’s estimated net worth on a GAAP basis has declined by $12 billion since the end of FY 2011.

The US Congress and the current administration will have little choice but to keep the FHA afloat. The alternative could be a "political suicide". And with the Fed supporting MBS issuance by the GSEs, the cheap government funding will continue to flow into the housing market. That makes these forecasts for a spike in housing starts in the near term quite credible.

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Some thoughts on household formation

An interesting article was published in the NY Times today entitled "Bundled Households". It discusses the fact that the younger generations live with their parents/relatives in larger numbers than in the past. Here are a few comments on the topic of household formation.

1. This trend is by no means new - see discussion.

2. The article points out that household formation has been slower than in a more "normal economy".

NYTimes: - Based on demographics and previous trends in household formation, it looks as if the country still has about 1.8 million fewer households today than it would have in a more “normal” economy, and most of that total household deficit is accounted for by the lower numbers of households formed by those in the 15-34 age group. Demographics suggest that there should be about 1.1 million more households headed by younger Americans today than there actually are.

What came before the the financial crisis (the "previous trends in household formation") was not particularly "normal", and making comparisons to that period is not always meaningful. The NY Times chart below is quite informative, but the blue and yellow component is likely the "new normal". Even as household formation improves, the increased number of young people living with their parents and larger households in general are here to stay - this is not necessarily some sort of a deviation.

Source: The New York Times

3. Clearly the sharp declines in household formation were driven by the economy. In time however households will resume forming at some "natural" pace which is linked to population growth. That "natural" pace is not necessarily the same as it was prior to the recession, but is likely higher than it has been recently. Economic conditions can work to delay household formation but can not stop it altogether, unless the US population growth slows. And we have no evidence of that so far.

US Resident Population (source: U.S. Census Bureau, Population Division)

To put it simply, in spite of households being bigger in the "new normal", there is a physical limit to how many more people can be packed into a single household. Of course more of the newly formed households are renters (see discussion) and many new households are simply several roommates living together (not necessarily based on family formation).

4. As discussed earlier (see this post), 2012 actually saw a sharp increase in household formation. We may be moving toward that "natural" trend, driven by population growth. Some attribute this to the improvement in the labor markets. Perhaps.

Source: Merrill Lynch

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The US housing market is not "a chicken-and-egg problem"

An article appeared in the NY Times last week that describes the sad state of the US housing market as a closed system that is stuck in a "negative feedback loop":

NY Times: - The economy will not recover until the housing market recovers, and the housing market will not recover until the broader economy recovers — a chicken-and-egg problem reflected, once again, in national housing figures.

And that may indeed be the case if it wasn't for the US demographics. It's hard for many to accept the fact that the US population did not stop growing after the financial crisis. At the same time new home construction has stalled, forcing inventories to shrink. The author of course argues that there is a massive number of homes yet to hit the market - people are just waiting until their equity values turn positive.

NY Times: - High unemployment, poor jobs, stagnating wages and tight lending standards keep buyers away, while many sellers — especially the estimated 13 million homeowners who owe more on their mortgages than their homes are worth — are waiting for a price rebound.

Of course there are millions waiting to sell their home. But once these homes are no longer "underwater" and the owners sell them, where are they going to move? The sellers will go out and buy another home - maybe somewhere else in the US. Some argue that many families will start renting once they get rid of their "underwater" house. Unlikely, but those who do will find a tight rental market - there are not many homes for rent and rents are up materially. And to put more rental homes on the market the landlords have to buy these properties somewhere - taking them out of the available inventory.

The point is that the US demographics now drive the housing market - more so than the US economic growth. It is not the closed system that the NY Times describes because the demand grows with population. With new home construction remaining weak, there are simply fewer places to live - only so many people can live in someone's basement. Available housing inventory per working-age person in the US is now at a 30-year low (at least).

Source: ISI Group

It is not "a chicken-and-egg problem". The housing market and the US economy are now far less coupled together than in the past, when strong housing markets generated construction based growth. And just as demographics more than the economy now drive improved demand for homes, a better housing market will not have the same positive impact on the economy as it did before the financial crisis. 

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Big pick up in demand for mortgages but the market is still bifurcated

The thesis of improving demand for US residential housing (driven by demographics) remains intact. The latest bank survey from the Fed indicates demand for mortgage loans is on the rise.

WSJ: - Nearly three in five U.S. banks surveyed by the Federal Reserve this summer said demand for loans to buy homes is growing as the housing market stabilizes and mortgage rates were falling to new lows.

But according to bank credit officers, credit standards continue to be as tight as they were in 2010.

WSJ: - The survey found that banks' credit standards aren't getting much easier for mortgage borrowers or small businesses. Among the loan officers surveyed, 93% said standards for approving mortgages to borrowers with strong credit were unchanged from the prior quarter, and 95% said standards were unchanged for firms with less than $50 million in annual sales.

In the corporate space, lending to larger companies with poor credit has not been an issue - those firms simply have to pay a higher rate. The lower the credit rating, the higher the spread charged. That approach keeps credit growth in the corporate sector humming because the weaker credits are more lucrative for banks. Mortgages on the other hand continue to be fairly binary - one either qualifies for a standard Fannie mortgage or does not, and there is very little between the two. With the subprime lending gone, the market has become bifurcated into those who are able to obtain a loan and have access to incredibly cheap financing and those who are not.

WSJ: - Buyers who qualify for loans are able to take advantage of extremely low rates. Average rates on 30-year-fixed mortgages have been below 4% since March and fell to around 3.5% last month, according to mortgage finance company Freddie Mac. Rates could fall even lower if the Fed takes further steps to prop up the economy later this year.

Much of that is driven by reliance on the GSEs, since banks still don't want to hold non-standard long-term (15-30 years) exposure to residential housing on their balance sheets. Banks originate the loans and sell them to GSEs or hold them in a portfolio that could easily be sold to GSEs (Chase for example). In fact over 90 percent of all mortgage loan originations are still government backed via the FHA, VA, or GSEs.

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All the subscribers to the housing Armageddon theories, just look at the data - the US housing market is beginning to recover

The US housing's bubble and its spectacular end left a indelible mark on people's view of residential property markets. Sadly the idea of a "permanent" US housing market decline has been drummed into the heads of numerous, often well educated and otherwise open-minded people. Hoards of angry bloggers keep spewing the same line over and over again - housing prices will fall "forever" because of the shadow inventory, etc., etc. People, including many in academia, would deny a housing market improvement even if it stared them in the face. Positive housing news cause many to experience what psychologists call "cognitive dissonance", as they desperately attempt to rationalize away the data that doesn't conform to their views.

The housing market bottom has to come some time, and as predicted at the beginning of the year (which really angered some of the folks described above), 2012 seems to be that year. Nobody is talking about a recovery of prices to the bubble years or even a robust growth in housing. We all know the issues. But on average across the US, home price declines have stopped.

Multiple data points are now suggesting that is indeed the case. A sudden spike in the FHFA housing price index is one of those points. A 1.8% monthly increase in March is the largest monthly move in recent years.

FHFA housing price index MoM SA

Our friends at ISI Group are continuing to see more recent improvements in April and May in their house price survey. That is in spite of otherwise jittery economic conditions in the US and the mess in Europe. Of course year over year the index is still down - we are not expecting any miracles here. But on a month-over month basis, the trend is unmistakable. This and other housing indices will be up from current levels this time next year.

ISI Group: - House prices are continuing to improve in may. ISI's house price survey, which covers over 40 residential real estate agents around the country, continued to improve this week, suggesting existing house prices, which surged in April, improved further in May.

Source: ISI Group

There are other indicators pointing to improvements, such as the stabilization in lumber prices in spite of the recent sharp drop in commodity prices.

Perhaps the best data point would be to hear it from the people on the ground - the realtors. The National Association of Realtors maintains a tremendous database and has done a thorough job in monitoring the health of the housing market. Their latest results indicate that distressed sales are beginning to taper off, the number of first time buyers is increasing, and prices are stabilizing.

NAR: - Lawrence Yun, NAR chief economist, said the housing recovery is underway. “It is no longer just the investors who are taking advantage of high affordability conditions. A return of normal home buying for occupancy is helping home sales across all price points, and now the recovery appears to be extending to home prices,” he said. “The general downtrend in both listed and shadow inventory has shifted from a buyers’ market to one that is much more balanced, but in some areas it has become a seller’s market.”

Here is the video.

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Will housing support growth?

Guest post by Greg Trotter

A great deal is still being said about the state of the housing market, with lingering excess inventories cited as the main reason for caution. These excess inventories are expected to still weigh on prices, particularly due to distressed sales, and have obviously pressured new housing starts. Fears of “shadow inventory” from severely delinquent borrowers and foreclosed properties sitting on bank balance sheets are of particular concern. While these concerns represent the current state of supply, what should we expect of the future?

The housing boom (from 2000) saw in excess of 2.8MM homes built over and above the 20 year average (through April 2012). However, the housing bust (from mid-2007) has seen 3.2MM fewer homes built than the 20 year average would imply. So, is the housing market under-supplied by 400k homes? Inventories, particularly “shadow inventories” would say no.

US New Privately Owned Housing Units Started by Structure Total SAAR  (click to enlarge)

Using the argument that lower new housing starts should have “eaten up” the excess from the housing boom, where has excess supply come from? The answer is lower household formation. With an abysmal job market, kids are moving back in with parents or not leaving home at all. People aren't getting married and are probably letting annoying roommates stick around. So, based on history what are these people waiting to do? The answer is “move out.” These people aren’t a reason that housing should be getting worse. They are a reason that housing is currently bad, but they should also be a reason that housing should get better. They are “shadow demand.” "

• http://soberlook.com/2012/01/story-of-household-formation-is-about.html
• https://content.putnam.com/literature/pdf/EO138.pdf

Angry Bear turns the household formation hypothesis around for a terrifying conclusion. Housing completions have completely overwhelmed household formation. Are housing completions too high, or are household formations too low? Housing starts are ½ the historical average.

• http://www.angrybearblog.com/2011/09/housing-vs-household-formation.html

What is holding “shadow demand” back? There are certainly at least two reasons, affordability and jobs. Housing affordability, by many metrics, has never been better, and some measures suggest that households have room for new debt service. That is just one side of the coin, though. The housing affordability metrics assume that borrowers have access to credit while, in reality, credit standards are very tight. And, while debt service cost may be low compared to recent history, it is held back by low interest rates—not low levels, and consumers, with worries about jobs and income growth, are likely loath to add to debt levels. On the jobs front, no one is going to kick out a roommate or move out on their own if they can’t cover the bills. While unemployment has come down from its peak, it has fallen more from people leaving the workforce than getting new jobs.

• http://seekingalpha.com/article/603971-historically-high-affordability-a-major-factor-in-housing-rebound-this-year
• http://www.ritholtz.com/blog/2011/04/cheapest-homes-in-40-years-not-even-close/

 Ratio of debt payments to disposable personal income (click to enlarge)

Household debt to personal disposable income (click to enlarge)

So, how does this mess get fixed? It requires jobs. Jobs are needed to pull “shadow demand” out of the woodwork and soak up excess inventory. If you argue that it is a problem with people wanting to rent instead of buy, there is a landlord for every renter. If you argue that no one wants the gutted and moldy houses that make up the shadow inventory, so much the better, it means more building activity. The argument here is that we are building up a supply/demand mismatch. Conventional wisdom says that it is an excess of supply, and, at today’s level of employment, that is right. However, as (if) employment improves, we could quickly move to a point of excess demand. So, if we get the economic spark, housing could be a real growth driver.

Now, here is one for the “structural decay” crowd. Yes, the idea that we have “shadow demand” to offset “shadow supply” assumes that employment improves. I’m not trying to argue that the economy has been cured of all its ills. I won’t even argue that it is definitely improving, although I believe that it is. I’m just going to argue that 1) low new housing starts have compensated for the excess supply from the boom years and 2) with improved employment, housing will support growth.

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Median age for first marriage spikes to record, holding back family formation

Given that household formation is such a critical driver of the housing market it is worth revisiting the subject by looking at some additional data. Here is what we've discussed so far:

1. Household formation is really driven by family formation (note that the two are not necessarily the same)

2. Michael Shermer had proposed that the decline in marriage is at the root of slower family formation.

3. But we also know that record numbers of young people currently live with their parents. That would suggest that we have a delay in first marriage (possibly caused by the economy but could also involve other factors), rather than a more permanent marriage decline.

There is another factor that supports the theory that the overall decline in marriage is caused by this delay. That factor is the falling divorce rate in the US, suggesting that divorces are not contributing to the overall marriage decline. The census data doesn't yet contain the 2010 and 2011 divorce rates, but the trend definitely shows a gradual reduction.

US divorce rate (Source: The US Census Bureau)

The most striking evidence for the "marriage delay theory" however is simply the rapid increase in the median age of first marriage. The median age is now the highest on record (since 1890).

Median age at first marriage (Source: The US Census Bureau)

Family formation has therefore been slowed by people getting married later in life. If the median age rate of increase is maintained, it is clearly bad news for family formation going forward. But it is difficult to see how such growth is sustainable. At the current rate, by the year 2025 the median age for a man getting married for the first time will be around 36 and for a woman it would be 32. These ages may be common among certain groups in metropolitan areas, but as a national median such late marriages are highly unlikely - even in 2025. We should therefore start seeing a slowdown in this trend in the near future.

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Is the lack of jobs to blame for more young people living with their parents?

As discussed before, the pressure on household formation is primarily coming from lower rates of family formation. The trend is quite unsettling as the number of young people living with their parents is continuing to grow to new records.

Source: JP Morgan

For many this is the new reality. Numerous explanations for this trend have been put forth, one of which is the decline in marriage rates - or delays of marriages. That in turn holds back household formation.

Source: CartoonStock.com

But the lack employment opportunities for the younger US population continues to be the primary suspect for this trend. The chart below shows the divergence in employment growth for young people vs. the older population. Some of this divergence is driven by permanent losses in low skill office jobs as well as structural changes that have taken place in construction employment.

Source: JP Morgan

One reason people continue to question the causality relationship between poor employment conditions and family formation is the fact that the last major disruption in younger population employment (2001) did not coincide with more younger people living at home. And the previous peak in the 25-34 year-olds living with their parents was actually during strong employment conditions in the US (90s).

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