More Young Adults Renting or Living with Parents
CLEVELAND – Younger adults increasingly are renting their housing or living with their parents rather than buying a residence, a report from the Cleveland Federal Reserve Bank says.
This trend began before the Great Recession but those economic hard times intensified it, the author, Timothy Dunne, found in “Household Formation and the Great Recession” released last week.
In fact, during the recession, the number of households fell in part because of the substantial number of number of households that combined,” Dunne found.
“The sharp declines in home ownership rates for the younger cohort shows little sign of recovering,” he concluded, “suggesting that when young adults start forming more households, it may have a stronger impact on the demand for rental properties than owner-occupied housing over the near term.”
In his analysis, Dunne found that from 1997 until 2007, some 1.5 million households on average were formed each year in the United States. That fell to 500,000 annually during the Great Recession, even though the U.S. population grew 2.7 million a year, slightly below the average of 2.9 million a year the preceding decade. “A modest rebound has since followed during the economic recovery, with 1.1 million households being created in 2011,” he wrote.
Dunne issued this caveat, “It is important to distinguish between changes in household formation due to demographics and those due to such factors as the recession. In the former case, one might expect some changes in household formation as the population ages or shifts across geographic locations.” During a recession, fewer households are formed.
Finding it hard to get a job or a job for which they are qualified because of training or education, “younger people may be less willing and able to strike out on their own and more likely to remain living with their parents,” Dunne wrote. In addition, during the Great Recession, lenders tightened their credit standards, which made it tougher for Americans in all demographics to secure a mortgage, but especially the young.
Younger adults today have a better appreciation of the need to develop a credit history and save for a down payment than their counterparts between 1997 and 2007, Dunne suggested.
Across all age groups, the likelihood that an adult was the head of a household in 2011 was 51.3%, but among those 18 to 34 the likelihood was 35.8%, the lowest in five years.
In 2007, the likelihood of an adult being the head of a household was 52% and someone in the 18 to 34 age group 37.9%. In 2008, the figures were 51.9% and 37.4%, respectively; in 2009, 51.6% and 36.9% and in 2010, 51.2% and 35.9%, Dunne found.
The group most affected was young adults, falling to 35.8% from 37.9%. “This group made up 22.3% of all households in 2007 but accounts for almost three-quarters of the overall shortfall in household formation over the period,” Dunne wrote. “One would have expected 1.9 million more households to have been headed by individuals aged 18 to 34 than we saw created by 2011.”
A greater share of adults ages 18 to 34 live in a household where their parents are the head. Two million more are living with their parents than Dunne would have projected had the housing bubble not burst and recession not occurred; 18.2% of the adults in this demographic remained unemployed in March 2011 compared to 10.3% ages 35 to 65.
Besides a decline in the number of households formed, “the individual’s choice of housing has shifted as well,’ Dunne wrote, “especially for younger adults.”
Before the Great Recession, roughly 40% of adults headed households and lived in the residences they owned. By 2010, this figure fell to 35.5% and the Census Bureau’s Housing Vacancy and Home Ownership Report issued earlier this year “indicates little sign of any abatement in declining homeownership rates for younger households,” Dunne wrote. “Clearly, reduced access to mortgage credit, the weak economy and uncertainty about the path of the housing market have decreased the likelihood that young heads of households will live in owner-occupied housing today.”
Published by The Business Journal, Youngstown, Ohio.