Slack Demand in U.S. Housing Market and Economy

Rodney Johnson |

housing recovery, housing market demand, young homebuyers

Studying and understanding demographic trends is critical when predicting generational spending patterns and long-term economic trends in our economy and markets.   

The Pew Research Center estimates that in 2012, 57 million Americans lived in multi-generational households, which is defined as two or more adult generations under the same roof. This is more than twice the number of people in such arrangements in 1980.

To be clear, no one thinks there's a rush to bring the aging parents of boomers back into the family home.

This is all about the kids who, at this point, have finished their education but have yet to move out (whether by choice or circumstance)... or have moved back with their parents, new families in tow, because of unemployment or financial troubles.

There are a million jokes and humorous stories about kids that won’t leave, but for those of us with kids in college, this is not a laughing matter.

What if they never leave?

Just under a quarter of the people 25 to 34 years old are living with their parents. That number was 18% in 2007, and 11% in 1980.

The really interesting part is that the number of adult kids living with their parents has continued to increase in the years since the financial crisis, instead of immediately soaring and then falling back. This means that we are storing more economic horsepower in the basement.

The big reasons for the change are obvious...

The recession put a lot of people out of work and stopped many people from finding employment. The effect on the jobs market alone was enough to drive many people back to their parents’ doorsteps. But this was not the only force at work.

Student loan debt was ramping up during the 2000s, so many graduates — whether employed or not — were carrying an extra burden.

Lending requirements were severely tightened. Many young workers who might have previously bought a home were cut out of the market.

Then there is the matter of their parents. There must be some subset of parents who welcome Junior back home so that he can help out with the mortgage payment. As we know, job losses affect people across the age spectrum.

It’s been six years since the financial crisis, and the latest research shows that we still have exceptionally high rates of multi-generational homes. Many of the problems that existed at the start of the financial crisis are still with us today, although maybe not to the same extent.

Employment is still difficult, but people are finding work. However, their level of compensation is still, on average, down by more than 7% from pre-crisis levels.

Student loan debt has done nothing but increase. At the same time, lending standards remain very strict, even though there are several programs meant to encourage first-time home buyers.

At this point, when multi-generational homes have been the trend for more than half a decade, it's possible that the initial shock, embarrassment, and basic weirdness of having adult children back in the house has worn off.

Perhaps both generations are realizing that, from an economic perspective, the arrangement can make sense as the younger group is able to save more of what they earn so that when they do strike out on their own, they do so in a stronger position.

But this comes at a cost. Young people are taking longer to get on the one-way train of consumer spending that tends to start with marriage, parenthood, and that all-important first home.

The real estate website, Trulia, recently reported that millennials are indeed taking longer to get on this path, which explains the drop in home purchases by this group.

If this trend continues, the economic recovery of the U.S. will take longer and be at a lower level than expected.

It’s possible that wages will pick up dramatically in the next 12 months, leading to a rush of confidence among young people and lenders. This will trigger a mass exodus from multi-generational homes and a huge bump in U.S. economic activity.

It’s possible, but we don’t see it happening.

With continued slack demand, the downward pressure on wages should remain in place, keeping a record number of adult kids entrenched in their parents’ homes, eating their food and blocking the driveway. This will lead to disappointment for those anticipating, and investing for, a strong rebound in housing and the economy in general.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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