In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi call class back into session as they kick off season 2 of The REconomy Summer School with an in-depth look at the foundation of housing demand – household formation, who forms households and when, and what even counts as a household.

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Listen to the REconomy Podcast™ Episode 118:

“If you want to understand housing demand, you need to look at which age groups are growing. Right now, millennials and older Gen Zers are entering their prime household formation years, resulting in a high headship rate. That's one reason why we've seen strong demand post pandemic.” – Odeta Kushi, deputy chief economist at First American

Transcript:

Odeta Kushi: Hello and welcome to episode 118 of the REconomy podcast, our first episode of this year’s summer school series, where we discuss economic issues that impact real estate, housing, and affordability. I am Odeta Kushi, Deputy Chief Economist at First American, and here with me is Mark Fleming, Chief Economist at First American. Hi Mark, summer school is officially in session!

Mark Fleming: Hi Odeta, this is exciting! Our listeners I am sure would be upset if I did not mention that this reminds me of the classic 1987 movie named similarly! Freddy Shoop and the Fabulous Thunderbirds! 

Odeta Kushi:You completely lost me….

Mark Fleming: I’ll send you the links!  Back to business. It’s our second year of the REconomy summer school and the theme of this year’s curriculum is going back to the basics. 

Odeta Kushi: That’s right! The syllabus for this semester is centered around supply and demand. But before you zone out on us, the takeaway from the series will be that we are entering a brave new world of housing…

Mark Fleming: An Aldus Huxley reference…. Very nice.. but I’m not sure if you meant that to be promising or perilous? 

Odeta Kushi: Well you’ll just have to attend class to find out! 

Mark Fleming: All Summer Long?  Couldn’t resist! But in all seriousness, I do think the housing market is headed towards change, and it all comes back to the fundamentals of supply and demand. Think back to a whole decade ago, in 2015… 

Odeta Kushi: Hard to believe that a decade ago is 2015!  In my head, a decade ago is still 2000…and 2015 is just a few years back. But ok I’m joining you in 2015. 

Mark Fleming:I know, time flies when you are having “econ” fun right! Well back then the housing market was on the cusp of a demographic transformation. I remember many were saying it would never happen! Millennials—the largest generation in U.S. history— didn’t want to become homeowners.  We were saying just wait….wait for it! Well as they aged into their prime home-buying years, they drove demand for homes and putting mounting pressure on supply. That dynamic was only accelerated by the global pandemic, which pulled forward demand and reshaped how and where people wanted to live.

Odeta Kushi:  It sure did, who can forget the double-digit price growth over the pandemic thanks to that supply AND demand shock.

Mark Fleming: Exactly, but as we look ahead the housing landscape is shifting again. Household formation in the next decade will be driven by changing generational dynamics that will introduce new complexity to both housing demand and supply. 

Odeta Kushi: Well that’s a great segue to today’s topic which is all about the foundation of housing demand: household formation. Who forms households and when? And what even counts as a household?

Mark Fleming: Lesson one… the foundation of demand. So let’s start with some definitions. In the housing world, we use the term headship rate and it’s a useful way to measure housing demand. The headship rate is the proportion of households relative to the total population. 

Odeta Kushi: So, if you flip it around, the population divided by households is like a proxy for household size. So a 49% headship rate means roughly 2 people per household…1 divided by 0.49. But I digress…

According to the Census Bureau definition: the householder refers to the person (or one of the people) in whose name the housing unit is owned or rented or, if there is no such person, any adult member, excluding roomers, boarders, or paid employees. If the house is owned or rented jointly by a married couple, the householder may be either spouse. The person designated as the householder is the "reference person" to whom the relationship of all other household members, if any, is recorded.

Mark Fleming: If you’re a student living at home with your parents, you are not considered your own household. If you move out and start renting your own place- even with roommates- you or one of your roommates becomes a (rented) household head. It’s a way of translating population into actual housing demand because of course we don’t need a housing unit for every person but would like enough housing units for every household.

Odeta Kushi: We should note that group quarters are specifically excluded from the count of households. Soo college dorm rooms aren’t counted. 

Mark Fleming: Good point! Now here’s why all of this matter. If we just look at population growth, we might get an inflated or misleading sense of housing demand. A growing population doesn’t automatically mean a growing number of households. What matter is how many people in that growing population are forming independent households. 

Odeta Kushi: That’s where headship rates come in. They help translate how many actual households we’ll need to house a population, based on how likely people in each age group are to form a household. And spoiler alert… it varies a lot by age and life stage. 

Mark Fleming: Exactly. And a lot of things influence headship rates—demographics, sure, but also economics. Marital rates, income, labor force participation, and even student debt. This is where household formation starts to intersect with some of the biggest social and economic trends. 

Odeta Kushi: So now that we have the definition out of the way and why it’s so important…let’s get to the numbers. According to our analysis of the Current Population Survey’s Annual Social and Economic Supplement, there were approximately 132 million households in the US in 2024. This number will vary slightly depending on the data you’re analyzing but we’re going to go with that as our baseline. The number of households is expected to grow by roughly 14 million between 2025 and 2045, depending on assumptions about population and headship. We won’t get into all of those assumptions for now but we use the methodology provided by the Harvard Joint Center for Housing.

Mark Fleming: And that’s the key: the assumptions! 

Odeta Kushi:  Isn’t it always with us economists? Have you heard that joke about the physicist, the chemist, and an economist?

Mark Fleming: Of course, what economist hasn’t? They were stranded on a desert island with no tools and a can of food. The physicist and the chemist each devised an ingenious mechanism for getting the can open while the economist said, "Assume we have a can opener!"

Odeta Kushi:  It’s funny because it’s true! But in this instance, those assumptions matter and we can play out different scenarios, but they all depend on how many people in each age group are expected to be household heads. That’s how we estimate our projections…by applying projected headship rates to projected population by age group. In other words, it’s not just how many people there are, it’s who they are, how old they are, and what stage of life they’re in. 

Mark Fleming: Younger households- say, under 25- have low headship rates. Think dorms, roommates, or staying with parents. Headship rises in the late 20s and 30s as people get jobs, move out, get married, and start families. Then it levels off or even declines at older ages due to mortality or people moving in together for caregiving.  

Odeta Kushi: So, if you want to understand housing demand, you need to look at which age groups are growing. Right now, millennials and old Gen Zers are entering their prime household formation years- a high headship rate. That’s one reason why we’ve seen strong demand post-pandemic. According to our analysis, the headship rate for the 25- to 34-year-old cohort increased from 43.5% in 2020 to 44.8% in 2024.  

Mark Fleming: That coincides with the millennial generation hitting their late 20s and early 30s. The pandemic accelerated this a bit, too, as people moved out of shared housing and cities.  

Odeta Kushi:  Now according to the Joint Center for Housing projections, the number of households in the US is expected to increase by 8.6 million, or approximately 860,000 per year between 2025 and 2035, or 8.6 million households over the next decade. This would be far less growth than in recent decades, including the slow 10 million households added over the decade in the wake of the Great Recession in the 2010s. The pace of growth is expected to slow between 2035 and 2045 to a gain of 5.1 million households. The projected slowdown in household growth will be driven by slowing population growth as a result of rising mortality and fewer births among an aging population. Again, there are assumptions here that could change over time. Immigration, for one, could drive these numbers higher or lower. 

Mark Fleming: Very true. The Joint Center also estimates that the aging of the baby boomer generation will drive up the number of households headed by a person aged 80 or over by nearly 60 percent by 2035 and lead this group to nearly double in size by 2045. 

Odeta Kushi: Well, this will also increase demand for accessibility in the housing stock to accommodate the needs of older householders. Think more renovations projects so that this generation can more comfortably age in place, which is a trend we’ve been seeing for some time. 

Mark Fleming: Consider that a 2019 Freddie Mac study found that seniors born after 1931 are staying in their homes longer, and aging in place. The result is higher homeownership rates for this group relative to previous cohorts. Freddie Mac estimates that this trend accounts for about 1.6 million houses held back from the market through 2018. The pattern is explained by a few key factors, such as better health and technology.

 
Odeta Kushi: Meanwhile, the number of middle-aged householders will rise with the Millennial generation, increasing demand for housing options for families with children. Recall that millennials are still aging into their 30s!

Mark Fleming: That’s a good tailwind for housing demand and will likely increase the amount of turnover in the market – the number of households selling and buying (something we will discuss in another summer school lesson), but an increase in the overall number of households, household growth, is projected to slowdown over the next two decades. 

Odeta Kushi: The Joint Center estimates that if we consider future demand for second homes and for replacement of homes demolished or otherwise removed from the housing stock (but not adding in any additional housing needed to account for the current housing shortage) then there will be a need for roughly 11 million new homes to be built between 2025 and 2035, slowing to 8.0 million new units needed between 2035 and 2045. As context, that’s less than the approximately 10 million units built in the 2010s and the 17 million units built between 2000 and 2009. 

Mark Fleming: Buuuut a lot of those baby boomer homes will need work, so the fixer upper will be popular again!

Odeta Kushi: Yes a shift away from construction of new homes to improvements of the existing stock!
Ok, I think it’s time for a pop quiz…

Mark Fleming: Already? Ok, what’ the question?

Odeta Kushi: Let’s say the U.S. population increased by 1 million people. Does that mean we need 1 million new homes?

Mark Fleming: Not likely! Housing demand = population * headship rate. And that’s housing demand of rented and owned households. And that’s why headship is a more reliable predictor of future housing needs than population alone. 

Odeta Kushi: It also helps explain why demand sometimes surprises us. For example, if the economy improves and young adults feel more confident moving out, headship rates go up- and housing demand rises faster.

Mark Fleming: Or vice versa. During the Global Financial Crisis, a lot of young people delayed moving out. Headship rates fell, and household formation stalled even though population kept growing. That was the rise of “boomerang kids,” moving back in with mom and dad. It was less Ferris Bueller’s Day Off, and more Failure to Launch.

Odeta Kushi: Wow, a 1986 and a 2006 movie reference. I’m impressed!

Mark Fleming: Since that’s two 80’s movie references I figured I would give a shout out to the millennials. 

Odeta Kushi: We appreciate it. Now I want to cover one other thing: a few of the demographic drivers of headship. First up: marriage. Married people are more likely to form households, and married couples account for a large proportion of family households in the US. Millennials are getting married later in life compared with their generational predecessors, which was one reason why homeownership demand was delayed for this group. 

Mark Fleming: Then there’s income and employment. If you’re not earning enough to afford a separate place, you’re more likely to live with parents or roommates. When the labor market is strong headship tends to rise. For example, in 2020 and 2021, wage growth, government stimulus, the pause in student debt repayment contributed to an unleashing of pent-up millennial household formation and demand for housing.   

Odeta Kushi: Great and timely example! And let’s not forget housing supply. Even if someone wants to form a household, they need a place to live. If there aren’t enough homes—or if prices are too high—headship might lag.

Mark Fleming: Ok so what is the main takeaways from today’s summer school session?

Odeta Kushi: Housing demand starts with household formation. And household formation starts with people making life transitions—jobs, relationships, independence.

Mark Fleming: Which reminds me of the immortal words of Simple Minds—“Don’t You Forget About Me.” That’s what headship is saying to every housing model that forgets to include it.

Odeta Kushi: Two 80’s movie references and one 80’s song reference? Before it gets any worse… I think I hear the school bell ringing..that’s class dismissed. Thank you for joining us on the first REconomy summer school session! If you have an economics related question, you’d like us to feature in the future, you can email us at economics@firstam.com. And as always, if you can’t wait for the next episode, follow us on X: @odetakushi for me, and @mflemingecon for Mark. Until next time!

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