Good news for parents with young adults still living at home: Goldman Sachs (GS) says they’re gonna move out … eventually.
More than 30 percent of 18- to 34-year-olds in the U.S. live with their parents, up from around 26 percent in the early 2000s. The trend started rising a couple years before the financial crisis, but it has picked up since then, sparking fears that the change is permanent. But in a new research report, Goldman economist Hui Shan suggests that’s not the case.
Instead, Shan argues, the trend is cyclical, not structural, and as the labor market continues to heal, young adults will start moving out and begin behaving like earlier generations of adult Americans: buying cars, buying TVs, making babies, forming their own households. Which is really the engine of the U.S. economy, where more than two-thirds of GDP is created by consumption. So this is good news. Writes Shan: “As the labor market continues to improve, we expect to see young individuals move out of their parents’ basements and live independently, boosting both household formation and construction activity.”
Shan first looks at how closely correlated the unemployment rate is with the share of 18- to 34-year-olds living with their parents and finds that the number of twenty-something basement-dwellers is lowest where work is available: In California, the unemployment rate spiked, and so did the share of young people living with their parents, while in North Dakota, the state with the lowest unemployment rate, not much has changed.
Shan’s point is that there’s no reason to think young people won’t follow the same pattern as every generation before them. That, in turn, would have huge implications for housing. The rate of household formation collapsed during the financial crisis and is still less than half what it was prerecession. Last year, total new housing starts were less than 930,000; in 2005, it was 2.1 million, according to Robert Dietz, an economist at the National Association of Home Builders.
That has caused some to ask whether the housing crisis permanently soured young adults on the idea of owning a home. Shan looks through the data and finds that the pattern we’ve seen in the past few years fits with what happened in three earlier regional housing busts in which home prices fell 30 percent: in oil-producing states in the early 1980s, in New England in the late 1980s, and in California in 1990. In all cases, the average size of individual households shot up in the years immediately following a peak in home prices but quickly fell again in the subsequent years.
On a national level, it’s already been about eight years since home prices peaked in 2006. There’s evidence that households are at least starting to shrink in size. According to census data, the average number of people in each household is down to 2.54 from a recent high of 2.59 in 2010—still supersmall by historic standards. From 1960 to 1980, the average was 3.1 people per household.
If Shan’s right, and young people do start moving out of their parents houses, the benefits could be enormous. For one, there are millions of them. Twenty-three year-olds are the largest age cohort in the U.S. People in their 20s outnumber people in their 30s, in their 40s, or in their 50s. This bulge of young people will ultimately drive consumption in the economy over the next few decades, much as the young baby boomers did 30 years ago. “All these attempts to suggest that this time it’s different and that we’re in the midst of a new paradigm shift more often than not prove wrong,” said Tobias Levkovich, chief equity strategist at Citigroup (C). Although consumption habits change, Levkovich says he doesn’t buy the notion that today’s young people don’t want to live on their own rather than under their parents’ roofs. “It’s hard to see a view where human nature gets diminished.”