Words of Optimism

Economics

Like the past few years, economic growth has not been strong in 2013. Yet, for some reason this year the country seems to have more optimism regarding prospects for the future. The obvious question is–why the optimism? To us it all boils down to two words — household formation. The creation of households bottomed during the most recent recession–down to below 400,000 per year from an average of 1.2 million per year over the past 65 years. This lower average was a significant drag on the economy. In the past two years, annual household growth has soared back to 1.1 million in 2011 and 2.4 million in 2012. Kids are moving out of their parents’ houses in droves. Why is this increase in household formation so important? It is more than just a direct relationship between formation and the need to build homes.

Even if the kids move out and rent an apartment, this increases demand for multi-family housing and we have seen this market recover significantly. Some will purchase or rent single family homes. And starting a household requires the purchase of furniture, cars, insurance and more. If you look at the projections for growth in the next few years, it is no wonder that single family home starts are expected to double from the depths of the recession by 2015 (see the article in the news section). It is also no wonder that the job growth is predicted to increase substantially in the next six months according to a Federal Reserve Bank of San Francisco report. We may be in a pause now because of the effects of the government shutdown and the accompanying uncertainty; however, growth spurred by household formation is inevitable. There can always be intervening variables, but the numbers are there for a solid recovery moving forward from here.

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