Housing Market Implications of Adult Children Living With Parents

News

Since
the start of the housing crisis the experts have noted the tendency
young adults to continue to live in their childhood homes. This they
say is contributing to the diminished rate of household formation
which is, in turn, lowering homeownership rates in the lower age
cohorts with the ultimate effect of holding back the housing and
construction recoveries.

Even
when young adults move out of their parents’ basement, as the
saying goes, they tend to share housing with other young adults. The
economists at CoreLogic have coined the name “the Renter
Generation” as an alternative designation for the age group more
broadly referred to as Millennials, those born between the early
1980s and early 2000s.

Fannie
Mae focused on the issue in a Commentary piece released on Tuesday,
using data collected through its National Housing Study (NHS) over
the first two quarters of 2014. Adult decision makers were asked
questions about their young adult children living at home, so all
responses are from the parents’ perspective. The analysis
addressed answers regarding two age groups, 18 to 22 year olds
(younger adult children) and 23-34 year olds (older adult children.)

Authors
of the Commentary, Why
Are Young Adults Living with Their Parents and When Will They Move
Out? s
uggest
that the issue of Why
is
driven by a
combination of personal financial constraints, age of the adult
child, and parental preferences.

The
NHS notes that the percentage of young adults between the ages of 18
and 34 who are living with their parents increased from the 27
percent average that prevailed between 1990 and 2006 to 31 percent in
2013. This means that some 22 million young adults, a group that
traditionally provides a substantial share of first-time homebuyers
is delaying the decision to form a household. Young adults also have
been experiencing higher rates of unemployment and are delaying
marriage, other factors surrounding their lack of household
formation.

Financial
reasons were the primary response
given by parents for why their
adult children are still living at home. As regards the younger
adult children, parents by a large margin say that they are “saving
money while enrolled in school.” It has also been reported in the
survey that the majority of this group are
“not currently employed in a paying job” or “employed
part-time” which impedes their ability to live on their own.

A
wider range of responses was given why older adult children were
still at home. Top responses include:

  • “They
    do not have enough income to live on their own.”

  • “They
    are not yet married.”

  • “They
    are saving money while enrolled in school.”

In
aggregate the primary reason for the older age group was financial
concerns even though half of that group is employed full time.

 

 

The
survey also found that most parents (68 percent) actually prefer
having their adult children live with them. As the chart below
indicates this preference was significantly lower among the parents
of older adult children than among parents of younger adults.

 

 

There
was also a difference in answers regarding financial attitudes. A
higher share of parents of younger adult children said their recent
personal financial situation had gotten better (+5 percent) or was
expected to get better (+11 percent) than the responses from parents
with older adult children. The parents of younger children also
were more frequently employed full-time, perhaps partially due to age
differences although reported rates of retirement in the two groups
were similar.

There
were also significant differences in attitudes by adult children age
groups in their respective parents’ attitudes about the potential
for their children to move out on their own. Fifty-two
percent of parents with older adult children expect their children to
move out in less than 2 years, whereas parents with younger adult
children were almost evenly split between less than 2 years (38
percent) and 2 to 5 years (34 percent). Overall the majority of the
children expect that they will more likely rent than buy a home when
they move out of their parents’ house.

 

 

Fannie
Mae adjusted these findings to be more comparable to the 2012
American
Community Survey (ACS) which showed that 67 percent of householders
under the age of 34 were renting and the homeownership rate was 33
percent. In the NHS survey 66 percent are more likely to rent, 34
percent to buy. “This could imply that young adults currently
living with their parents may not have a substantial impact on
shifting the near-term homeownership rate when they do move out of
their parent’s home,” the commentary says. It adds that a recent
NHS found that more than 90 percent of young renters said they are
likely to buy a home at some point in the future.

As
results suggest that the age of the adult child and personal
financial constraints combine with parental preferences to keep adult
children at home, it remains to be seen whether that latter reason
will lead to a lifestyle change that slows household formation even
as the economy improves. However since financial reasons account
for most parental responses as to why young adults are living at
home, it seems likely that they, especially the older group, will
start to form their own households once they feel confident about
their financial situation and future prospects.

Another
commentary, this time by CoreLogic’s Chief Economist Mark Fleming
in his company’s blog, looks at one of the financial constraints
alluded to in the Fannie Mae piece. In “Generation
Renter’s” Student Loan Burden” Fleming looks at the extent to
which that debt may be impacting homeownership.

He
recounts a discussion by a panel of experts on housing, finance, and
education at an Urban Institute event addressing whether this debt is
actually preventing the Millennial generation (or Fleming’s term
“Generation Renter”) from becoming homebuyers.

The panel featured
Jeffrey P. Thompson, economist at the Board of Governors of the
Federal Reserve System; Meta Brown, senior economist at the Federal
Reserve Bank of New York; Sandy Baum, senior fellow at the Urban
Institute and research professor of education policy at George
Washington University; and Beth Akers, fellow at the Brown Center on
Education Policy at the Brookings Institution. Fleming said the
evidence seemed to suggest the answer is no.

First, a study by
Akers and her Brookings colleagues found that the student debt
burden, the required monthly debt payment as a percentage of income,
has remained practically unchanged since the mid-1990s. Even with
the aggregate debt now above $1 trillion, with more individuals
holding greater amounts of debt, and with stagnant U.S. income
growth, the facts cannot lead to the conclusion that student loan
debt is a bigger burden that will prevent homeownership. If going to
college still increases one’s earning potential and the debt burden
is unchanged from the 1990s and young people then found a way to buy
a home, why wouldn’t young people today, with the same relative
burden, be able to do the same?

Thompson’s
empirical modeling of the
level of educational attainment among
those who have student loan debt shows little evidence of a strong
reduction in the likelihood of homeownership for those who complete
their education, but does find the likelihood reduced those with
student debt who do not complete their education.  Accumulating
the debt but not earning the degree results in the burden without any
benefit as, on average, getting a college degree results in higher
earnings.

Baum noted that one
must be careful
with the averages used in the Brookings analysis
because of wide variations in the outcomes for those with debt. In
particular, the detrimental impact on financial stability for those
who don’t complete a degree. The post-secondary system and related
financing policies need to consider and address the burden of college
debt without the benefit of a degree

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