Too Many Young Adults Are Still Living at Home, and It's Hurting the Economy

The U.S. still isn't creating as many new homes as we used to -- in a large part because young adults are still with their parents.

Today, the Census announced that there were 746,000 new households formed this year -- way below the 1.1 million household average.

This makes sense if you think about it. During the recession, fewer households – one or more people living under the same roof – were created than normal. Typically, 1.1 million new households are added each year in the U.S., mostly due to population growth. However, from the first quarter of 2008 to the first quarter of 2011, only 450,000 new households were created annually. Slower household growth means less demand for homes, so annual construction starts dropped during this period from a norm of 1.4 million to below 600,000. Most recently, only 521,000 households were created between the first quarter of 2012 and the first quarter of 2013.

A big part of the slowdown in household formation was due to young people living with parents or doubling up with roommates rather than setting up house on their own. Since most kids won’t live with their parents forever, these young adults represent "pent-up demand" for housing that the recovery should unleash. Problem is: the kids aren’t moving out yet.

More Than Two Million Missing Households

While other measures of the housing recovery are chugging along – like foreclosures, prices, sales, and construction – household formation is lagging. Thanks to years of below-normal household formation, the number of "missing households" has accumulated. Our early analysis of the 2013 Current Population Survey data (see note below) shows that there are still 2.4 million missing households, stubbornly close to the high of 2.6 million in 2010 and 2011. That’s equivalent to more than two years of normal household formation that have gone missing:

Year

Number of "missing" households, millions

2008

0.9

2009

1.8

2010

2.6

2011

2.6

2012

2.3

2013

2.4

Note: estimate takes into account changes in the age distribution of the population. See note at end of post.

 

Young Adults Aren’t Leaving the Nest Yet

The majority of the missing households are young people who aren’t heading up their own households. Instead, they’re living with their parents: the share of 18-to-34-year-olds living with their parents rose from around 27 percent before the crash to above 31 percent, where it remains in 2013. And when it comes to getting a Millennial to move out of their parents' home, having a job matters a lot. Specifically, 44 percent of 18-to-34-year-olds without jobs live with their parents, versus 25 percent of 18-to-34-year-olds with jobs. But household formation isn’t ONLY about jobs. Even employed 18-to-34-year-olds are more likely to live with their parents in 2013 than before the recession:

Housing Recovery Depends on Household Formation

Household formation is the most important indicator of the housing recovery that ISN’T making great strides. Comparing where the number of missing households (2.4 million) is today with the worst point (2.6 million in 2010) of the recession, the number of missing households is down just 7 percent. The likelihood that young people live with their parents is just 8 percent back to normal (when comparing 31.3  percent in 2013 with the worst point – 31.6 percent in 2012 – and the 2000-2007 "normal" of 27.4 percent). Therefore, household formation is severely lagging behind the rest of the housing recovery. The other recovery measures we track monthly with the Trulia Housing Barometer are much further along: existing home sales are 82 percent back to normal, the delinquency + foreclosure rate is 57 percent back to normal, and even construction starts are 43 percent back to normal. In contrast, household formation has barely begun to recover.

What will it take for household formation to bounce back? Jobs will help, but the job recovery for young people still has a long way to go. While more young adults are working now than a year ago, their employment rate is still much closer to the worst of the recession than to pre-recession levels. As late as mid-2008, 71 percent of adults ages 18-34 were employed. That dropped to a low of 65 percent in mid-2011 and has risen back only to 66.8 percent. But you don’t get a job one day and move out of Mom and Dad’s the next. It could still take years before young people have built up the savings and economic security to leave the nest.

The good news is that when young adults do move out, we’ll see a surge in demand for homes, especially for rentals. For the number of missing households to decline, the rate of household formation would have to rise above the normal 1.1 million that reflects typical population growth (just as job growth has to be higher than the growth in the labor force in order to bring the unemployment rate down). But clearly that surge hasn’t come yet.

The very long explanatory note:

This analysis is based on the Current Population Survey March Annual Social and Economic Supplement from 2000 to 2012 and the CPS basic monthly files from March 2012 and March 2013. Both the Bureau of Labor Statistics monthly unemployment rate and the Census quarterly home-ownership report are based on the CPS data. We used the 2000-2012 CPS ASEC files from the Integrated Public Use Microdata Series (Miriam King, Steven Ruggles, J. Trent Alexander, Sarah Flood, Katie Genadek, Matthew B. Schroeder, Brandon Trampe, and Rebecca Vick. Integrated Public Use Microdata Series, Current Population Survey: Version 3.0. [Machine-readable database]. Minneapolis: University of Minnesota, 2010).

The 2013 CPS ASEC file has not been published yet. Our 2013 estimates are based on adding the difference between the 2012 and 2013 CPS basic monthly files for March, using final person weights, to the levels reported in the 2012 CPS ASEC. Because the basic monthly and ASEC files use different weights, it would not be appropriate to compare the 2012 ASEC using supplement weights directly to the 2013 basic monthly file using final person weights. Our approach gives a reasonable early estimate of what the 2013 ASEC will show when published.

We calculated "missing households" by multiplying, separately for each age cohort, (1) the difference in the age cohort’s “headship rate” (the percent of adults who are heads of household) between 2013 and the 2000-2007 average and (2) the estimated number of adults in that age cohort. Our calculation of missing households therefore takes into account the changing age distribution of the population, which is important because the population is aging and older people are more likely to head their own households than younger people are. Failing to make this age adjustment would understate the expected baseline growth in the headship rate and would therefore underestimate the number of missing households. The headship rate for all adults 18 and older, without making any adjustment for the age distribution, fell from 52.3 percent in 2003 to 51.2 percent in 2010 and then rose to 51.6 percent in 2013.

Household formation and headship rates derived from other data sources, like the American Community Survey (ACS) or the decennial Census, differ from those derived from the CPS. The disadvantage of the CPS is that it is based on a much smaller sample, but it is much more current than the ACS and decennial Census.

This post originally appeared on the Trulia Trends blog, an Atlantic partner site.

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