As you may remember from your science classes back in grade school, the world is full of potential energy. Potential energy is stored and ready to be released—a ball sitting atop a hill poised to roll down or an arrow waiting in a drawn bow. We think the housing market has potential energy of its own too. Currently there are thousands of potential households hidden within existing households—potential home buying energy waiting to be released into the housing market of the future.
For multiple decades, rent prices have outpaced income growth. The rising expense of housing has led to greater rates of household compression, or families and individuals doubling up, combining their incomes to be better able to afford a shared home. Due to doubling, thousands of potential households are tucked away, hidden inside the homes of existing households.
In 2000, the average number of adults per household was 1.75. By 2012, this number had steadily increased to 1.83. If the number of adults per household instead remained constant over that period, we would have 5.4 million extra households on top of the existing 116 million households. These extra households are a source of potential housing energy. The national level of potential housing energy amounts to a 4.7 percent increase in the number of households.
The level of potential housing energy varies widely across the U.S. Larger, more populous metro areas understandably have greater levels of hidden households. The interesting comparison comes from the share of existing households represented by these potential households. Among the largest 35 metro areas in the U.S., the markets with the highest share of potential energy are Riverside, Miami-Fort Lauderdale and Orlando, where the uncoupling of existing households would imply a 12.6, 11.3 and 10.5 percent increase in the number of households, respectively. As discussed in an earlier brief, these metros experience low rental affordability—households pay more than 30 percent of their combined income on rent, more than the historic share. The high rent expense incentivizes individuals to add to their combined household income by adding more earners.
While estimating if or when these hidden households will enter the housing market on their own is difficult, we do expect some of these hidden households to start spinning out into their own as economic conditions improve, unemployment rates continue to drop and incomes begin to rise. But where will they live? The ratio between the level of potential home buying energy and the number of available vacancies—vacant homes listed for-sale or for-rent—also varies widely. This ratio may be an indicator of future pressure to increase the housing stock. For the largest 35 markets, this potential pressure is greatest in Riverside, Los Angeles and San Diego, where the number of potential extra households is 3, 2.7 and 2.6 times more than the number of currently available vacancies, respectively.
