CBO Misleads on Household Formation?

Last year, the Congressional Budget Office reported in its “Budget and Economic Outlook” that better job prospects and easier access to mortgages would help accelerate household formation. At the same time it raised concerns that student loans were inhibiting people from buying houses.

I thought the CBO was living in a fantasy world about household formation, and soon after the Federal Reserve Bank of New York agreed with me. However, going by this year’s “Budget and Economic Outlook,” it looks like I could be wrong: Household formation started rising as the CBO predicted.

"Household formation is the change in the average number of households from one calendar year to the next."

“Household formation is the change in the average number of households from one calendar year to the next.”

(Page 163)

At first I thought, “Well, it might be the start of a trend, but I don’t see why it’ll continue.” But then I looked at the Census Bureau’s household data (Table 13a), which the CBO was clearly relying on. It turns out, when you look at the whole calendar year, and not just the average, household formation spiked until mid-2015, and then it collapsed.

YoY Change in Household Formation by Month

Household growth in 2015 could be a blip in either direction, but I’m curious how 2.2 million households would choose to form in December 2014. Seems like an awful time of year to do it. Even the CBO concedes household formation could be slower than it expects (page 54).

I think the CBO should’ve inspected the household data a little more closely before concluding that residential real-estate construction would contribute to economic growth. It said nothing about the vacancy rate, which I’ll look into when the Census Bureau updates those data.


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