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An overlooked indicator just plunged, and that could signal trouble ahead

Breaking down the "puzzle" of sliding household formations

The rate of household formations growth has declined significantly this year, and some say this could have negative implications for the broader economy.

According to a new report from Torsten Slok, chief international economist at Deutsche Bank, the substantial slowing in household formation growth this year comes after years of rather fairly steady growth after the financial crisis.

The implications for slowing household formation, largely an issue for younger generations and a function of the country's demographics, bleeds into consumption patterns, gross domestic product growth, and productivity across the economy and into financial markets. Slok called it an issue he is watching quite closely at this juncture.

"After the housing crisis, many young people moved back into the basement with their parents, and it's taken several years to get these kids out of the basement and out to form new households. We have seen a fairly steady trend over the last several years of household formations doing relatively well, but more recently it's been a bit puzzling as we've seen a significant decline in household formation," Slok said Wednesday on CNBC's "Trading Nation."

The culprit may come down to declining housing affordability, he said, which is the "No. 1 suspect" for the lack of household formation (defined as becoming the head of a household rather than forming a family and still living with parents or an older generation) amid relatively healthy job growth and payroll figures.

"This, of course, is a real worry, because house prices have gone up a lot; they are back to the same level as where they were in 2006. And this trend of housing still being relatively unaffordable, which has been now for the last year or two, is somewhat problematic because it means that we can't get people out ... we can't get younger generations out and find homes. Therefore, if they are stuck together, or with their parents, then we have a problem that affordability has slowed down," he said.

In other words, it may signal that income and wage growth has been weak relative to how quickly home prices have shot up.

Data published Wednesday from the Commerce Department showed new home sales, too, unexpectedly fell in July to the lowest level in seven months, spurring fears of a slowdown in the housing recovery.

Shifting demographics are incredibly important for the financial markets, and what it means for stocks going forward, as younger generations tend to save more, and invest more in the market, whereas older generations tend to sell their stocks upon retirement.

Indeed, the slowdown in household formation over the past two years has "caught economists off guard because the improving housing and unemployment backdrop pointed in the opposite direction," said Jeremy Lawson, chief economist at Aberdeen Standard Investments.

"Going underneath the headline figures the drop in the rate of household formation seems attributable to dynamics in the condominium rental market. After a large increase in supply over recent years to service the growing pool of renters created by the housing bust, the markets appear to have become oversupplied, with vacancy rates increasing for the first time since the lead-up to the financial crisis," Lawson wrote in an email to CNBC on Thursday.

One reason for the weaker demand, relative to supply, may be due in part to the moderation in real disposable income growth over the past several quarters, he suggested.

Ultimately, the slowdown is significant for equity markets because newly formed households are an "important source of demand for durable goods and hence the sales growth that underpins corporate earnings."

A hidden driver of markets and the economy