What happens to household formation in a recession?

While many studies have investigated the determinants of housing demand, very few studies have focused on how economic conditions affect the formation of potential households directly. Potential households may choose to delay entry into the housing market by remaining with one's parents during times of economic hardship or by combining with other persons to share housing costs. Using a variety of modeling approaches, we find that both the increase in the unemployment rate and the presence of recessions reduce the rate of household formation. Simulations suggest that these declines are substantively important. For example, in a recession, the likelihood that a young adult will form an independent household falls by 1-9% points depending on the age of the person. By way of comparison, if an individual is unemployed, the likelihood of leaving the parental home is up to 11% points lower. (C) 2013 Elsevier Inc. All rights reserved.