Shrinking Household Size Strains California’s Housing Market

Opinion by Public CEO

California’s housing crisis stems from too much demand chasing after limited supply. Policymakers have been taking steps to address the supply side of this equation by paring back regulatory burdens and pushing local governments to promote more new construction. But the demand side is not static. COVID and changing demographic patterns have also conspired to place additional strain on the housing market, despite the state’s declining population.

During the pandemic, demand-side pressure on the housing market has emerged in part from a “spreading out” of Californians across more housing units as people sought to limit their exposure to the virus and as remote work allowed many to live farther from their job location. The number of people per household fell sharply at the outset of the pandemic, dropping 2.7% from 2.93 in 2020 to 2.85 in 2021. It then declined again by 1.4% to 2.81 in 2022. During this time, the share of adults heading a household went up. These changes mean that there are now more households for a given population—and that more housing is needed to support this population.

The pace of new housing construction has not kept up with the number of Californians forming new households. Between 2019 and 2021, the state added 366,000 households but only 254,000 housing units, according to the Department of Finance. Household formation during the pandemic outpaced net new construction by nearly 112,000 units, further tightening the state’s housing market.

As new households form, they fill up new units and vacant homes, pushing up prices and rents. Between January 2020 and January 2022, vacancy rates declined from 7.6% to 6.7%, according to the Department of Finance, while home values and rents increased 23% and 17% respectively, according to Zillow.

Trends in household formation varied across age groups. Adults ages 35–44 and 65–74 experienced the largest increase in new households (5.4% and 5.5%, respectively), and those ages 25–34 saw the next-largest increase (2.9%). However, the reasons behind these trends differed: for those ages 65–74, the increase was driven by a growing population, but for young adults, increases in the shares heading a household played a big role. Between 2019 and 2021, the shares heading a household increased 1.4 percentage points among adults 35–44 and 2.2 percentage points among adults 25–34.

Strong income growth even during the worst of the pandemic has helped to quicken the pace of household formation. After rising 10% from 2017 to 2019, personal income went up by 18% from 2019 to 2021—in part due to the infusion of federal and state income supports. In addition, emergency rental assistance and moratoriums on foreclosures and evictions helped to keep some households together that would otherwise have dissolved during the pandemic. It is also possible that remote work was a contributing factor as well. For example, young adults working from home might have been more motivated to move out of their parents’ homes. Or roommates working from home might have decided to split up instead of sharing the same space all day. Such changes may underlie the recently documented link between remote work and housing demand.

Looking ahead, the key question is whether these changes are a one-time surge or a more permanent trend. Increased household formation could continue given the strength of the labor market and underlying demographic trends (e.g., the peak of the millennial generation is still moving through the age range when household formation accelerates) as well as pandemic-driven changes in remote work and where people prefer to live. However, affordability continues to be an important factor discouraging new household formation, and this will worsen as interest rates rise and new mortgages become more expensive. Whether or not growth in new household formation continues will greatly influence the strain on the state’s already tight housing market.