Housing Formation and Unemployment Rates

This paper investigates the impact of shocks in the unemployment rate on
household formation. Prior research has shown that negative economic shocks reduce
household formation, but does not inform how long the declines in household formation
will persist. Using time series data from 1975 to 2011, we examine how households
respond to unemployment rate shocks and estimate the length of time it takes for
households to return to its original level in a vector autoregressive model. The results
demonstrate that household formation falls in the quarter after unemployment increases,
and that it can take up to 10 quarters to return its previous level.While this is a substantial
length of time, one implication of these results is that even a permanent increase in the
unemployment rate will not permanently affect housing formation in the long run.

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