The Saeculum Decoded
A Blog by Neil Howe
Mar 252012

Some generations come of age in inflationary eras, when midlife bond owners suffer but when young debtors can easily escape from the consequences of bad choices—since the real value of debt just seems to melt away under the impact of rising nominal wages. Boomers came of age in such an era. Other generations come of age in deflationary eras, when midlife bond owners are rewarded but when young debtors are relentlessly punished. Millennials are coming of age in such an era.

In this post, I’m going to publish one of our recent Social Intelligence articles, on “Why Young Adults Aren’t Buying Homes.” There’s a lot going into this mix, but pay special attention to the role debt is playing in slowing both this generation’s willingness to spend—and their ability to buy a home.

First-time home buying by young adults is way down, according to a new white paper by the New York Fed and an annual report by the Joint Center for Housing Studies of Harvard University. The Fed data show that only 9 percent of 29-to-34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. The Harvard study shows that the share of householders under age 35 owning their own home in 2010 was just 39.1 percent, the lowest since 1995.

This is bad news for a housing market that is still struggling to recover from the Great Recession. Even upper-end houses are affected, since without first-time buyers, lower-end owners will struggle to “buy up.” It is even worse news for Millennials and late-wave Gen Xers.  Homeownership rates for young adults dropped during the 1980s and reached post-war lows around 1990, but then made a gradual, if partial, recovery in the 1990s and early ‘00s thanks to declining interest rates.  Since the recession, however, homeownership rates for young adults have plunged back down to near-1990 lows despite record-low interest rates and very attractive prices for a new home. What’s going on?

The big-picture story, concludes a recent study by the Chicago Fed, is simple. First, young couples are not giving birth to children as young as they used to—and childbearing is strongly associated with home purchasing.  Yet this only partly explains the dearth of home buying because the homeownership rates of young couples with children have fallen sharply as well. The second long-term driver, argues the Chicago Fed study, is “heightened income risk”—which basically means the declining prospect of income growth among young households. That doesn’t sound good. And it isn’t.

Lately, much of this “heightened income risk” represents the greater likelihood of unemployment—which today is 14 percent for people age 25 and under versus 7 percent for people over age 25, according to the U.S. Bureau of Labor Statistics (BLS).  Also according to the BLS, less than 47 percent of 16-to-24-year-olds have had a job since 2007—the lowest rate since the BLS started keeping records in 1948. Even for young adults who do land jobs, their average wage is declining over the long term. According to recent research from the Economic Policy Institute, the average wage in 2011 for male college graduates ages 23-29 was $21.68 per hour—an 11 percent decline in inflation-adjusted dollars over the last 10 years. Wages for females in the same age and education group were down 8 percent during the same time period.  (For both men and women who went straight from high school into the workforce, the real declines according to EPI were similar.)

OK, now let’s imagine a 30ish couple for whom everything has gone right: They have college degrees, they’ve never been unemployed, and their wage growth has kept up with that of older Americans.  For them, there’s yet another hurdle: debt, specifically college loans.  According to another recent New York Fed study, total student loans outstanding are at an all-time high of $870 billion dollars—more than the total for credit cards ($693 billion) or auto loans ($730 billion). For someone in his or her 30s, the average college loan balance is now $28,500, and balances over $50,000 are common. Debt at this level stifles consumer spending and can render many young people ineligible for home mortgages, no matter how low the interest rate.

Note: the estimate of $870 billion in student loans made by the New York Fed a couple of weeks ago was superceded last Thursday by a report by the Consumer Financial Protection Bureau (a federal agency).  The CFPB’s new estimate is that total outstanding student loans passed $1 trillion late last year.

Young people who can’t buy a home are renting in larger numbers.  They are also moving in with their parents in larger numbers.  Increasingly, Boomer parents intervene to help their adult children buy their first home, either by cosigning the mortgage or by lending the money to them directly. Direct lending is not only good for Millennials, but also for Boomers parents who may enjoy getting a return of 4.0 percent on their assets rather than 0.4 percent on a low-risk CD. And as much as Boomers love their Millennial kids, they may also want their own space back—finally.

For anyone following the rising trend in multi-generational households (especially young adults living with their parents), take a look at this new Pew study.  Tabulating Census data, the study notes that whereas in 1980 only 11 percent of 25–35 year-olds were living with their parents or grandparents (a postwar low point), by 2011 that figure had doubled to 22 percent.  Millennials have now moved back to the way young adults lived before 1950 and the building of suburbia.  They’ve moved back to the “Frank Capra” household.

So what do most Americans think about the economic hardships facing today’s young adults?  While older generations usually resist any claim that young “have it harder” than they did, this time may be different. A recent Pew Research Center study found that a plurality of the public (41 percent) does indeed believe young adults are having the hardest time in today’s economy, and large majorities (70 to 80 percent) agree that it’s harder for today’s youth than it was for them to find a job, save for the future, pay for college, or buy a home.

Yet if older people may be worried about the economic future of today’s youth, Millennials themselves aren’t.  The Pew study also found that despite the difficult times they face, Millennials remain very optimistic about the future.  Nearly 90 percent of 18-to-34-year-olds polled in the study said that they either make enough money to lead the kind of life they want now, or expect to earn enough money in the future. Optimism is one of the most defining characteristics of Millennials, and in these tough times, it is arguably their best asset—that and their understanding and patient Boomer parents.

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