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Move on Out

Move on Out

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Published by Samuel Rines
Roughly 30% of young adults between the ages of 18-34 live at home in the US. This lack of "householding" was driven higher during the recession because of the rise in unemployment and uncertainty. The return of these basement dwellers to the housing market could be the jolt in the arm the US needs.
Roughly 30% of young adults between the ages of 18-34 live at home in the US. This lack of "householding" was driven higher during the recession because of the rise in unemployment and uncertainty. The return of these basement dwellers to the housing market could be the jolt in the arm the US needs.

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Published by: Samuel Rines on Feb 01, 2013
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ow does an economy generate almost 21million people between the ages of 18and 30 living at home? With an economicheadwind strong enough to deter theseindividuals from migrating to independence.Facing a difficult labor maret and ever increas-ing education costs, the lure of living rent free (ornearly so) and reducing debt overcame the draw of independence. The Great Recession with its blea labor maret forced many potential homebuyersinto Mom’s basement.Household formation affects the economythrough its effect on housing demand—bothsingle family and multifamily—which is typicallydriven by the 25 to 34 year old crowd. These young adults are a fundamental piece of the realestate maret, and about 31 percent of young adults between 18 and 34 live with their parents.And this is not entirely surprising. After all, thereare two primary conditions for the formation of a household—a reasonable cost for housing andan income stream to support it. As prospects foremployment became increasingly dreary, staying at home became an increasingly viable option.However, the economy seems to be slowly improv-ing with employment ticing up and growthreturning to the housing maret, and these forcescould unleash an army of basement dwellers intothe economy.
Hand (and House) Holding 
As people leave the nest and gain independence,they create households. In the early 00’s until2007, the average rate of household formation inthe US was about 1.5 million per year. But from2008 to 2010 more and more people opted tostay at home and ride out the recession and therate dropped to 500,000 per year. In 2011, themost recent year statistics are available from theCensus Bureau, there were over a million house-holds formed, still below the longer-term trend.The recent rebound was driven by nonfamilyhouseholds, where people live alone or withnon-relatives. In fact, since 2008 there has beena decline of 350,000 married households, but anincrease of 1.16 million nonfamily households.This corresponds to an increase in the medianage of a first marriage, which has trended upwardfor both males and females over the past decade.For men the median age increased to 28.2 from26.8, and for women it rose from 25.1 to 26.1.These might not seem lie large moves, but theycause a delay in household creation. This is not anew trend in the US. In 1950, the median age of marriage was 22.8 for men and 20.3 for women— 
Move on Out?
Samuel Rines
February 2013
people are marrying roughly 6 years later.Average first marriage age is not the only fac-tor—the incentives to live at home while pursuing higher education are great. Student debt loadshave been increasing consistently, and the latestFair Isaac data puts the average student-loandebt at more than $27,000. Mitigating additionalexpenses, such as housing, could incentivizestudents to stay at home longer after incurring these debts.Much lie the average age of a first marriage,the increase in the number of people living withtheir parents is neither a new nor an isolatedtrend. After declining from 1940 to 1980, the rateof multigenerational households among young adults has been increasing. And Europeans, forexample, have witnessed this prolonged delay of householding much lie the US, due to high youthunemployment and the lac of confidence thatcomes with poor employment prospects.
Household Shortfall and Giving a Push
The Federal Reserve estimates that the GreatRecession cost the US about 2.6 million house-holds by 2011. The 18 to 34 group alone had ashortfall of 1.9 million. This is both a blessing anda curse. We can expect some benefits as house-hold formation catches up and housing demandnormalizes around the growth. However, it taestime for households to form, and there could beinterruptions in the process. Another recessionor shoc to employment could severely shae theconfidence of these consumers.The recession had a direct impact on theformation of households through its effect on thelabor and credit marets. Tighter credit maretsforced individuals to save longer for the necessarydown payment for housing, or to build credit his-tories where none were previously necessary. Thedifficulty is exacerbated for young adults, espe-cially those with less than a college education.Young adults are also at a much greater dis-advantage when it comes to employment. At theend of 2012 the US unemployment rate was 7.8percent. But the unemployment rate for peoplebetween 16 and 19 is 23.5 percent, 20 to 24 sitsat 13.7 percent, and 25 to 34 sits at 7.7 percent.While the economy is improving, it will tae sometime for the improvements to wor their waydown the employment ladder. Up to a point, theprospects for employment become better with age,as sill development and training mae worersmore attractive to employers. Thus, the unem-ployment rate declines to 6.6 percent for ages 35to 44 and to 5.8 percent for ages 45 to 54, whichin turn builds confidence for individuals acrosstime and maes independence less risy.Employment prospects and wages improvewith educational attainment, and higher wagesand job security are important for fostering household formation. A person who graduatedfrom college or beyond is more than 1.6 times asliely to leave their parent’s home. Not surpris-ingly, there is also a correlation between earningsand leaving home—as earnings rise, the chanceof creating a household rises. This is intuitive butillustrates the importance of being able to affordthe move to independence. For instance, part of the reason for moving into the home after collegeis to reduce the costs of looing for wor. Andthose with a college degree have less difficultyfinding a job match, and therefore have the abil-ity to leave more quicly. This supports the ideathat, for many, living at home (or moving bac) isa way to “get their feet under them” and meant tobe a temporary arrangement.
The Great Independence Move
2011 saw 1.1 million households created. A con-tinued bounce will require employment and wagegrowth and stabilization in housing prices. Thecurrent Federal Reserve policy aiming to reduceunemployment to 6.5 percent in the aggregate isa positive for household formation, as it shouldbring down the rate somewhat even for the younger bracets and educational groups.But for the economy, it also matters what indof households are formed. There is a difference inthe spending power, and therefore economic rele- vancy, of the mean household. Family householdshave mean incomes of nearly $80,000 with mar-ried couples pulling in a mean household wage of $91,000. The mean nonfamily household incomeis about $44,000 with female headed householdsmaing $38,000 and male headed households$50,000. Granted, these are not representativeof younger households which will typically havelower than the mean income for their group, butit does indicate a general trend. Families havemuch more spending power, and have more of animpact versus the creation of a nonfamily house-
“Much like the average age of a first marriage, the increase in the number of people living with their parents isneither new nor an isolated trend.” “The economy seems to be slowlyimproving with employment ticking up and growth returning to thehousing market, and these forcescould unleash an army of basement dwellers into the economy.” 

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