Although young adults are expected to drive housing demand over the next decade, rising costs could dampen the projected rate of household formation, according to Freddie Mac’s March Insight.
With young adults aged 25 to 34 numbering almost 45 million according to census data, the demographic should be fueling the housing market. However, the percentage of those young adults heading a household, called the headship rate, has fallen 3.6 percentage points since 2000.
Freddie Mac said housing costs and labor market outcomes are the primary drivers of the slowdown in household formation rates among young adults. While real median house prices have surged 29% from 2000 to 2016, per capita real incomes among young adults rose only 1% over the same period. Meanwhile, the labor force participation rate for the age group has declined substantially in recent years, particularly for men.
Freddie Mac also noted that millennials have been slower to reach traditional milestones associated with adulthood, including getting married, having children, and forming their own households. However, despite entering the housing market later than older generations, Freddie Mac expects the age group to add new households at a higher rate. Together with Generation Z, Freddie Mac estimates additional net new households to total 19 million to 21 million by 2025.
"We expect that as life progresses and today's young adults age, they will add around 20 million households to the US economy, driving housing demand over the next decade,” Freddie Mac Deputy Chief Economist Len Kiefer said. “But housing costs are a major factor holding back young adult household formations. Our research results indicate that 28% of the decline in young adult household formation is due to housing costs. If housing costs continue to rise, we could see about 600,000 fewer households over the next decade."