San Diego Business Journal

Decline in Household Formation Hampering San Diego Economy

By Mike Allen Thursday, June 12, 2014

A big reason why San Diego’s economy remains stuck in second gear is a marked decline in household formation, according to a new report from think tank National University System Institute for Policy Research.

Before the recession, the number of people per household in San Diego was about 2.7 persons, but it’s risen to 2.8 persons this year. That one-tenth of a point is significant because it translates to some 6,000 new households formed rather than the 27,500 that would have formed had the area maintained the historic average, the report says.

The reduced number affects new construction and reduced need for financing services, both of which used to be big drivers of the local economy.

“The combination of lower household formation, high unemployment and tightened lending standards crushed the local residential building economy,” said Kelly Cunningham, the NUSIPR economist who authored the report.

Using data on new building permits, last year the region created 8,315 units, yet that’s only about half of the average of 15,000 to 16,000 new units created from 1990 to 2006, the report said.

The report found that the key reason behind the lower household formation is because younger people aren’t leaving the nest. Pre-recession, 27 percent of 18- to 34-year-olds lived with their parents. Today that share is up to 31 percent, not because they prefer the arrangement but because they can’t find a decent job, the report said.

Even among those younger people who are employed, many don’t feel that secure and are carrying excess debt from student loans, severely limiting the amount they can spend on rent or a mortgage payment, the report said.

“Whatever the cause, the result is they are delaying signing a lease or getting a mortgage,” Cunningham said.

Until rates of household formation return to historic averages, the economy will likely remain stuck, and unlikely to be the jobs engine it had been in the past, he said.