Agenda - Council Work Session - 09/24/2013

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been a major contributor to the sharp decline in residential construction following 2006 in the Metropolitan Area and nationally. The decline in household formation is a national trend and was documented in a recent analysis published by the Cleveland Federal Reserve Bank. This report found that annual household formation in the United States fell from an average of 1.5 million households in the 1997 to 2007 period to 500,000 per year in 2010, a level that is one-third of the annual households formed in the previous 10 years. The great recession reduced the formation of households by two-thirds. The shortfall in household formation was estimated at 2.6 million households. The decline in households was not uniform across all age cohorts. Nationally, households age 18 to 34 accounted for 25.6 million households or 21.6 percent of total households in 2011. This group, however, accounted for 1.9 million or 73 percent of the shortfall in household formation. The recession had a dramatic impact on the economic prospects for the 18 to 34 age cohort as unemployment increased and job openings evaporated as a result of the recession and the sluggish recovery that has created few jobs. The recession caused adult children to move home, singles to double -up, and homeowners to take in renters reducing the rate of household formation. During the past 10 years, Metropolitan Area residential building permits declined from a peak of 20,973 units in 2003 to 4,028 in 2009, as shown in Table 4-16. The housing boom undoubtedly fueled the high number of building permits in the 1999 to 2004 period. Building permits fell below average in 2005 and began a sharp decline in 2007. While it was not apparent at that time, this decline coincided with a significant decline in household formation. Between 2006 and 2009, building permits fell from 12,109 to 4,028 in 2009, a two-thirds drop similar to the drop in household formation nationally. In past recessions, declines in household formation have been less severe and have been reflected in slight drops in building permits and decreased apartment occupancy rates. During the Great Recession, those declines have been greater and lasted longer due to the slow recovery. In the Metropolitan Area, as the economy has improved and the unemployment rate has declined, there's been an increase in the number of building permits issued, particularly for multi -family housing. This indicates that the rate of household formation is beginning to increase creating demand for new housing. It's uncertain how long it will take household formation to recover to previous levels, but the process seems to be underway. At some point, there may be an increase in household formation that makes up for some of the household formation that did not occur in 2008, 2009, 2010, and 2011. How much pent up demand exists is subject to speculation. Stabilized Residential Demand The estimates of future housing demand in incorporate State Demographer estimates of future household growth for 10-year periods. These estimates represent stabilized residential demand based on long-term household growth estimates and do not reflect cyclical changes in household formations. The relationship of stabilized residential demand to past annual building permits and household formations for the Metropolitan Area are shown on Figure 4-4. The blue bars represent annual unit building permits and the horizontal black lines represent average annual household growth for 1990 to 2000 and 2000 to 2010. The red bars represent stabilized future residential demand. 4-19