Kids Moving Out Are a Boon to the Economy

Shelby Webb rented her first apartment on Apr. 9 after landing a job translating ads for a Spanish-language newspaper in Chattanooga. About the same time, 24-year-old Anna Stokkebye, who was hired full-time in January as a website designer, closed on a $155,000 two-bedroom condominium in Charlotte. Both left their parents' homes to move into their new digs. "I love my parents, but I didn't want to live with them anymore," says Webb, 22.

The two women are at the forefront of a trend that could help boost consumer spending and lift housing out of the funk it's been in for the past four years. During the recession, millions of young people moved back in with their parents or delayed leaving them because they couldn't find jobs. As employment picks up, more of them will strike out on their own—forming a "household," in demographic parlance, and creating demand for housing and a broad range of consumer goods.

About 20 million adult children in the U.S. live with their parents, and most are eager to move, says Peter Francese, a demographic analyst for advertising agency Ogilvy & Mather. "Most guys who live at home beyond some young age walk around with a great big 'L' [for "loser"] on their forehead," Francese says. "As more young people feel they will be able to keep a job, bingo, they're gone."

This year, nearly 1 million new households will be created, UBS Securities (UBS) predicts, up from the 357,000 in the year ended March 2010, the lowest number for a 12-month period on record since the Census Bureau started tracking household starts in 1960. New households will help increase housing starts to about 648,000 this year and to nearly 900,000 in 2012, vs. 586,800 last year, estimates researcher Metrostudy. U.S. household formation in the three years ended March 2010 was roughly 40 percent of the long-term average, or about 500,000 annually, according to Census data. "Household-formation rates are already tipping back upward" as job gains allow some people "to spread out," says Brad Hunter, Metrostudy's chief economist. "The demographic component of housing demand is strong; it's just the economic and psychological components that are holding things back."

When people move into a new home, they tend to spend. A typical new renter spends $600 to $1,900 on furniture, appliances, and other stuff related to setting up housekeeping in the first six months, says C. Britt Beemer, chairman of America's Research Group in Charleston, S.C. Although Webb bought most of her furniture and a washer-dryer combo at yard sales or from classified ads, she did lay out some cash at Wal-Mart for new housewares. And Stokkebye has bought several hundred dollars' worth of paint, tools, dishes, and other supplies. "I just cleaned out Ikea on Sunday," she says.

A Bloomberg survey of 59 economists in early April predicts that consumer spending will rise 2.8 percent both this year and next, vs. an average of 1.8 percent in the last eight quarters. Jim O'Sullivan, chief economist at MF Global Holdings in New York, is more bullish, predicting increases of 3.2 percent for 2011 and 3.4 percent next year. Young people leaving their parents' homes "have the ability to spend, and they spend on all of the things associated with setting up a household," O'Sullivan says.

Another demographic shift should play a role as well: more divorces, which also create new households. The number of divorces dropped to 6.8 per 1,000 people in 2009 from 7.4 in 2006, prior to the recession, government figures show. A survey this year by the National Marriage Project at the University of Virginia found that 38 percent of people considering a divorce or separation put aside those plans because of the recession. St. Louis-based divorce-law specialist Cordell & Cordell says its customer count rose by about 20 percent in the first quarter. "We see things moving in a positive direction, from our perspective," says principal partner Joseph E. Cordell.

The bottom line: Some young adults are finally leaving the nest and creating new households, spending up to $1,900 on furnishings.

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