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Residential Department: DataDecoded: April 2015

 

DataDecoded

Hidden households could heat up the housing market

This year has been hailed as the year when first-time buyers will move aggressively back into the purchase market after nearly a five-year hiatus. Although it’s still too early to tell how much the housing market will heat up, four economic and societal forces point in the same direction:

  • Investors and foreign nationals. These buyers are gradually retreating from the market as prices approach precrisis levels and profit margins narrow.
  • Credit standards. Tight credit standards are gradually easing for the loans that matter most to first-time buyers, such as low-downpayment options.
  • Labor market. Employment rates are rising and income growth is finally picking up.
  • American Dream. A generation of renters is still dreaming of homeownership.

Despite the speculation about the return of potential homebuyers, hard data is scarce. To put some numbers behind this phenomenon, Zillow used data from the U.S. Census Bureau’s 2013 American Community Survey to estimate the number of hidden households across the country’s metro areas. In grade-school science terms, these hidden households are analogous to the concept of potential energy: They are like stored households just waiting to be released into the market.

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According to Zillow’s estimates, there are as many as 5.4 million hidden households in the United States waiting to enter the market. If all of this potential energy was released, the number of households in the U.S. would increase by as much as 4.7 percent.

To identify these households, we calculated the current number of unrelated working-age adults per household — those who have decided to reside together to share expenses. This ratio increased sharply during the Great Recession, and we assume the ratio will begin to fall as the economy recovers. We then estimated how many new households would be created if the number of adults per household fell back to its historic level.

By metro area, the largest numbers of hidden households are in Los Angeles, New York, Miami and Riverside, California, which together account for nearly 1 million potential homebuyers. If this potential energy was released, the number of households would increase most — relative to current household numbers — in Riverside (+12.6 percent); Miami (+11.3 percent); Orlando, Florida (+10.5 percent); San Diego (+8.3 percent); and Los Angeles (+7.5 percent). By contrast, Cleveland and Pittsburgh have relatively few hidden households.

When measured against the number of vacancies, Southern California metros top the list again. There are about 3.05 potential new households for every vacant home in Riverside, 2.7 in Los Angeles, and 2.6 in San Diego.The number of potential households exceeds the number of vacancies in 26 of the top 35 metro areas, which means homebuyers will continue to face competition for available homes throughout 2015 and possibly beyond.

The demographics of the potential homebuyers living in hidden households are interesting. Some share rentals with housemates, while others are living — often rent-free — with their parents or grandparents. Not all are young people, however; many are middle-aged or elderly. As the economy improves, some of these hidden households will begin to unravel. Young renters sharing a home are the most likely to think about purchasing  a home, while those currently living with family are more likely to rent for some time before they consider buying. Regardless, as the number of these doubled-up households begins to fall and more first-time buyers move into the market, the potential energy they release will be felt throughout the industry. 


 

Aaron Terrazas is an economic research analyst at Zillow. He joined Zillow’s industry-leading economics and quantitative modeling group in January 2014. He produces real estate data and performs econometric analysis, focusing primarily on mortgage lending and rental markets. Terrazas received his undergraduate education at Georgetown University, an M.S. in applied economics from Johns Hopkins University, and is certified in econometric forecasting from the International Institute of Forecasters. He previously worked as an economist in the U.S. Treasury Department’s office of economic policy. Contact Zillow at (206) 757-2701 or zillow.com.

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