How can I get webforms to show household and household members?
Prefilling a webform value depends on other values already being there. If the individual is not selected at the time the webform loads, then there's no way for it to populate the household. So you are correct, selecting a different contact 1 on the form will not cause contact 2 to be changed.

One workaround would be to create 2 webforms - the fist one being an incredibly simple form that allows you to autocomplete the individual's name and a submit button that redirects you to form 2 with cid in the url. Not perfect but it would work.