Housing still a drag on economy as young adults forgo buying their first home

May 2012

With unemployment trending downward (albeit at a very slow pace) and the stock market having doubled since March 2009, the economy seems to be picking up. Unfortunately, one economic indicator that really impacts many of us- real estate, specifically home values – has continued to lag. Subdivisions are littered with “for sale” signs and even though housing sales have seen some modest increases, there remains a long way to go before housing regains the values reached a few short years ago.

I am often asked for a forecast of the housing market and I have always said it will be a long, long time before housing recovers to its pre-recession levels. There are many reasons why I believe housing prices will only see modest improvement for many years. The recession and market crash in 2008 resulted in substantial financial losses which has eliminated many potential buyers of homes. Furthermore, the lending requirements have become considerably more stringent as a result of the financial meltdown (the days of obtaining a mortgage without income verification, for example, is no longer available). As a result there will be fewer buyers of homes to reduce the excess supply, which is needed to drive housing prices upward. And until unemployment is reduced substantially and people with jobs are confident that their income is secure, I don’t think housing can make any significant improvement.

The aforementioned facts are obvious, but a less obvious reason for the slow pace of the recovery of the housing market is the lack of demand for housing by young adults. The recession reduced the rate in which Americans set up new homes or apartments by at least 50 percent according to the Census Bureau. Even though the number of new households has begun to recover, the growth rate continues to lag its historic pace.

According to the Pew Research Center, more than 20 percent of adults between the ages of 25 and 34 live with their parents, the highest total since the 1950s. The weak job market has increased the number of young adult children returning to live with their parents. The Pew Research Center noted that 29 percent of parents with adult children reported that their children have moved back in with them. The lack of demand for housing and increase in young adults returning home to their parents has resulted in more than 2 million fewer occupied homes nationwide when compared to the rate at which Americans moved into new households before the recession. According to the National Association of Home Builders, approximately two-thirds of the excess vacant housing in the country is not the result of excess supply but rather a drop in demand as the result of the recession. In addition, the lack of young adults buying their own homes has also caused the demand for furniture, appliances and other items that usually accompany setting up households to lag.

According to the Pew study, young adults moving back in with their parents are part of a broader trend toward multi-generational living. The number of Americans living in multi-generational households has been increasing steadily since 1980 and has increased significantly during the past five years. In fact, from 2007 to 2009 the increase in the number of Americans living in multi-generational households—from 46.5 million to 51.4 million—was the largest increase in modern history, and is at the highest levels since the 1950s.

Since 1960, housing has led the United States out of most recessions. Unfortunately, the lack of the demand for housing is a key reason for the lukewarm pace of the economic rebound, and without a greater participation by young adults it will make it even more difficult for housing to rebound.


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