Chappaqua NY Needs Less Roommates For Real Estate To Expand | Chappaqua NY Real EState

What does the American economy need to get back on its feet? The key may lie in housing, which remains in the doldrums. Recent data does show existing home sales are rising, but increasing mortgage rates won’t aid recovery. What would help tremendously would be fewer roommates.

While it’s true that stalled construction and population growth are gradually taking a bite from the country’s glut of vacant homes, hard times mean more people are shacking up together and fewer immigrants are climbing the fence. When this trend reverses, better times for everyone — from cable operators and builders to Home Depot — will follow.

As an investment theme, “household formation” may sound wonky. In fact, it’s a key factor in how the economy will perform in the coming year. The measure basically calculates how many healthy cells there are in the U.S. real estate body. When foreigners move in and buy a home, or the kids move out and into an apartment, the number of households increases. That, in turn, creates an economic ripple effect.

A small rise in household formation has a beneficial effect on large swaths of the economy, and with it on earnings and the stock market more broadly. Most obviously, sales of new homes and the materials needed to build or refurbish them increase. Homeowners buy appliances from General Electric, speakers from Best Buy and Sherwin Williams paint. Cable companies like Comcast and Time Warner  sign up new customers, and utilities turn on more light bulbs. Allstate writes more homeowner policies.

The trouble is, despite robust demographic numbers, this figure has been growing sluggishly in recent years. The government estimates that fewer than 400,000 households were formed in each of the past two years ending in March. The average should be around 1.4 million per year, based on how people behaved prior to the financial panic.

Indeed, it’s a big reason for the continuing overcapacity in the housing market. Fewer than 800,000 new housing units were erected in 2009 and the number should be roughly the same this year. That’s the slowest pace by far in four decades. The real estate glut should largely be history given such a glacial pace of construction. Yet rental and homeowner vacancies remain at elevated levels.

So why is household formation down? Difficult economic times have forced people to try to save money — and the biggest cost to cut is habitation. People are more likely to shack up and share apartments, and homeowners take on renters to help with the mortgage. The footprints in the data are easily spotted. The percentage of 25-to-34 year-olds living at home is at a three-decade high, according to the U.S. Census Bureau. Even divorce rates are down. Arguing, it seems, is cheaper than paying two mortgages.

Hard times also mean America isn’t as attractive a destination to jobseekers. The number of legal immigrants living in the United States fell in 2009. Moreover, illegal immigration appears to have fallen sharply, based on border interdictions.

Some of these changes should unwind over time. Checking accounts fill, mortgages amortize, and thirty-somethings realize how hard it is to meet prospective mates when living at home. Eventually, people strike out or decide that having a tenant in the basement is not financially worth the noise and invasion of privacy.

Moreover, real estate prices have fallen by about a third from their peak in most cities, according to the Case-Shiller index. This makes it easier to afford rent or a down payment. Rental vacancies peaked last fall, and home vacancies in late 2008.

Yet higher rates of employment, and more certainty over jobs, would be a greater spur, as they are strongly linked to household formation. People are reluctant to move out or buy a home if they aren’t working, or think mass firings are imminent.

Therein lies the chicken and egg enigma. Construction is typically one of the first sectors to recover from a recession. The continuing property glut means employment is about 2 million below its 2006 peak, according to the Bureau of Labor Statistics. Since it hasn’t revived, the United States is attracting fewer immigrants and people aren’t forming households.

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