Household formation is the most “underreported” factor in why rent and home price growth is slowing in the housing market, according to Calculated Risk blog author Bill McBride. While housing formation increased sharply in 2021, McBride projects that the current slowdown in household formation will take pressure off demand, and likely cool prices in the housing market.
During the pandemic’s housing frenzy, rising home prices pressurized the rental market, squeezing renters and first-time homebuyers as prices reached record heights. But now, as higher mortgage rates temper demand for home buying, McBride doesn’t think that will translate to even more pressure on the rental market.
“With household formation low, I don’t think that’s going to happen,” he said.
Now, as the dust settles from the pandemic, “what we’re seeing is household formation is really slowing down dramatically,” McBride said.
“That’s completely because we had this huge surge in household formation primarily due to work from home,” McBride said. “That’s why rents aren’t booming more with high mortgage rates. As a matter of fact, everything’s cooling because household formation is cooling.”
That slowdown in household formation, combined with high mortgage rates compound the impacts on demand for housing, which could help explain how quickly and sharply home prices are starting to correct, especially in housing markets in the West that became ground zero for the pandemic housing frenzy. Those include Boise, Idaho; Austin, Texas; and Salt Lake City, Utah
