Shrinking household size is weighing on California’s housing market

The California housing crisis is due to too much demand chasing limited supply. Policymakers have taken steps to address the supply side of this equation by easing regulatory burdens and urging local governments to encourage more new construction. But the demand side is not static. COVID and changing demographic patterns have also conspired to put additional strain on the housing market, despite the state’s declining population.

During the pandemic, demand-side pressures on the housing market have arisen in part from a “spreading” of Californians into more housing units as people sought to limit their exposure to the virus and as remote work allowed many to live farther from their jobs Location. The number of persons per household fell sharply at the beginning of the pandemic, falling by 2.7% from 2.93 in 2020 to 2.85 in 2021. It then fell again by 1.4% to 2.81 in the year 2022. During this time, the proportion of adults running a household decreased. These changes mean that there are now more households for a given population group – and that more homes are needed to support that population group.

The pace of new home construction has not kept pace with the number of Californians starting new homes. Between 2019 and 2021, the state added 366,000 households but only 254,000 housing units, according to the Treasury Department. Budget creation during the pandemic exceeded net new construction by nearly 112,000 units, further tightening the state’s housing market.

As new households form, they fill new units and vacant homes, driving up prices and rents. Between January 2020 and January 2022, vacancy rates fell from 7.6% to 6.7%, according to the Treasury Department, while home values ​​and rents rose 23% and 17%, respectively, according to Zillow.

Household formation trends varied by age group. Adults aged 35-44 and 65-74 experienced the largest increases in new households (5.4% and 5.5%, respectively), and those aged 25-34 saw the second largest increase (2.9%). However, the reasons for these trends varied: for 65-74 year olds the increase was due to a growing population, but for young adults the increase in the proportion of heads of household played a major role. Between 2019 and 2021, the proportion of heads of household increased by 1.4 percentage points among 35-44 year-olds and by 2.2 percentage points among 25-34 year-olds.

Strong income growth even during the worst of the pandemic has helped accelerate the pace of household formation. After personal income grew 10% from 2017-2019, it rose 18% from 2019-2021 — partly due to the infusion of federal and state income support. Additionally, emergency rent relief and moratoria on foreclosures and evictions helped hold together some households that would otherwise have been broken up during the pandemic. It’s also possible that remote work was a contributing factor. For example, young adults who work from home may have been more motivated to move out of their parents’ home. Or roommates who work from home may have decided to split up rather than share the same space all day. Such changes may underlie the recently documented association between teleworking and housing needs.

Looking ahead, the key question is whether these changes are a one-off increase or a more sustained trend. Given the strength of the labor market and underlying demographic trends (e.g., the peak millennial generation is still moving through the age range as household formation accelerates), as well as pandemic-driven changes in remote work and where people, the increased start-up could be of households prefer to live. However, affordability remains a major factor discouraging the creation of new households, and this will worsen as interest rates rise and new mortgages become more expensive. Whether or not growth in new household creations continues will have a major impact on the strain on the country’s already tight housing market.