A new paper suggests an increase in household formation during COVID-19 has helped keep rent prices high:
In this case, Ozimek and his coauthor, Eric Carlson, used heaps of 2021 census data to illustrate how housing markets in large cities were caught between two powerful, competing forces. The first was outbound migration, which led to weaker housing demand in city centers. Previous work by Stanford researchers Arjun Ramani and Nicholas Bloom found there was a “donut effect” earlier on in the pandemic, in which housing demand fell in dense urban areas as people moved to the surrounding residential areas and suburbs. Between July 2021 and June 2022, New York City lost a net 194,000 residents to migration, while Los Angeles lost 109,000, Chicago lost 88,000, and San Francisco shed about 20,000, an analysis of census data by John Burns Research and Consulting found. In the case of New York City, EIG’s latest analysis of data from the US Postal Service confirmed there hadn’t been a subsequent surge in people moving back to the city.
Instead, the sudden flight to the burbs was counteracted, Ozimek and Carlson said, by an equally startling surge in household formation. A household refers to any group of people living together in one unit — a family of five in a suburban home counts as one household, as does a group of three roommates living in an urban apartment. If those three roommates move out and each gets a one-bedroom unit, the net effect is two additional households. Before the pandemic, US household formation was on the decline. Between 2010 and 2020, the increase in the number of households was the lowest on record, an analysis by Pew Research Center found. Slow population growth and an increase in the number of adults living with their parents, perhaps as a result of the economy’s choppy recovery, meant there were fewer people striking out on their own. That changed shortly after the pandemic hit — household formation jumped by 2.5% nationally in 2021, more than double the fastest rate since the Great Recession.
This surge in household formation caused an increase in the “extensive margin of demand” — essentially, the total number of housing units that a given population desires. But EIG’s latest paper goes one step further, saying there was also an increase in the “intensive margin,” or the size and quality of units that people demand. Put another way, remote work led to an increase in the number of people wanting not only places of their own but also bigger homes. A couple might seek to upgrade from a one-bedroom to a two-bed, or they might look for a one-bedroom with more square footage. This desire to trade up is evident in the rent payments of people who shifted to remote work: Becoming a remote-work household in 2021 was associated with a 20% increase in rent payments, or about a $500 increase each month, the EIG researchers found.
Of course, those effects weren’t felt equally everywhere. To return to the “donut” analogy, the hole in the center — the most densely populated, expensive part of a metropolitan area — was likely to lose population as a result of more people working remotely. But it was also more likely to see a greater increase in household formation.
The headline for the story suggests this is about people wanting to live alone but the summary of the paper suggests people adjusted to changing work and economic conditions by seeking out more space for themselves. Did people seek their own household to get away from others or to have more space for themselves and work? If money was no object, would American residents prioritize more space or living with people?
I wonder how this connects to longer-term patterns of more American living alone.