Income Growth Is Key For Housing Demand

If income growth is key for greater household formation, housing analysts say some recent progress on the salary front may soon unleash pent-up housing demand among younger adults.

While all age groups, except for those above age 65, continue to experience lower incomes than in 2007, according to a U.S. Census Bureau Current Population chart, analysts say a notable change that started last year is continuing among younger households — those under age 35 — who are seeing income gains.                        housing demand

“For individuals in the key household formation period of age 25 to 34, a 0.87 percent decline in median income in 2012 reversed to a 1.1 percent increase in 2013,” notes economist Robert Dietz on the National Association of Home Builders’ Eye on Housing blog. “If these improvements continue, it will be good news for housing demand going forward.”

Indeed, in recent commentary, a Fannie Mae economist notes an improving financial picture for young adults that could help jump-start household formations.

“The Great Recession and housing bust hit young adults hard,” writes Patrick Simmons, director of strategic planning for the economic research group at Fannie. “The unemployment rate for 25- to 34-year-olds more than doubled between 2007 and 2010, and real median household income for this group fell by nearly 10 percent during the downturn. As economic conditions deteriorated, young-adult household formation and home ownership fell sharply. In recent years, however, young Americans’ economic circumstances have begun to brighten, with the unemployment rate for 25- to 34-year-olds dropping and their income stabilizing.”

Also, the rate of housing cost burdens among young owner-occupants continues to fall: In 2013, fewer than one in four young home owners spent more than 30 percent of household income on housing expenses. That rate is 13 percentage points below the 2007 peak as well as “significantly lower than in 2000, prior to the mortgage credit bubble,” Simmons notes.

“The continued slide in household formation and home ownership among young adults suggests that more robust labor market improvements, among other factors, are needed for young Americans to get a stronger foothold in the housing market,” Simmons says. “The large decline in home owner affordability problems among young adults indicates that substantial housing market changes in the wake of the housing bust have created a generation of young home owners who have housing costs that are much better aligned with incomes.”

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Source: NAHB

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