February 2013

A PUBLICATION OF CHILTON CAPITAL MANAGEMENT

W W W.CHILTONCAPITAL.COM

Move on Out?
Samuel Rines

However, the economy seems to be slowly improving with employment ticking up and growth returning to the housing market, and these forces could unleash an army of basement dwellers into the economy. Hand (and House) Holding As people leave the nest and gain independence, they create households. In the early 00s until 2007, the average rate of household formation in the US was about 1.5 million per year. But from 2008 to 2010 more and more people opted to stay at home and ride out the recession and the rate dropped to 500,000 per year. In 2011, the most recent year statistics are available from the Census Bureau, there were over a million households formed, still below the longer-term trend. The recent rebound was driven by nonfamily households, where people live alone or with non-relatives. In fact, since 2008 there has been a decline of 350,000 married households, but an increase of 1.16 million nonfamily households. This corresponds to an increase in the median age of a first marriage, which has trended upward for both males and females over the past decade. For men the median age increased to 28.2 from 26.8, and for women it rose from 25.1 to 26.1. These might not seem like large moves, but they cause a delay in household creation. This is not a new trend in the US. In 1950, the median age of marriage was 22.8 for men and 20.3 for women

ow does an economy generate almost 21 million people between the ages of 18 and 30 living at home? With an economic headwind strong enough to deter these individuals from migrating to independence. Facing a difficult labor market and ever increasing education costs, the lure of living rent free (or nearly so) and reducing debt overcame the draw of independence. The Great Recession with its bleak labor market forced many potential homebuyers into Moms basement. Household formation affects the economy through its effect on housing demandboth single family and multifamilywhich is typically driven by the 25 to 34 year old crowd. These young adults are a fundamental piece of the real estate market, and about 31 percent of young adults between 18 and 34 live with their parents. And this is not entirely surprising. After all, there are two primary conditions for the formation of a householda reasonable cost for housing and an income stream to support it. As prospects for employment became increasingly dreary, staying at home became an increasingly viable option.

people are marrying roughly 6 years later. Average first marriage age is not the only factorthe incentives to live at home while pursuing higher education are great. Student debt loads have been increasing consistently, and the latest Fair Isaac data puts the average student-loan debt at more than $27,000. Mitigating additional expenses, such as housing, could incentivize students to stay at home longer after incurring these debts. Much like the average age of a first marriage, the increase in the number of people living with their parents is neither a new nor an isolated trend. After declining from 1940 to 1980, the rate of multigenerational households among young adults has been increasing. And Europeans, for example, have witnessed this prolonged delay of householding much like the US, due to high youth unemployment and the lack of confidence that comes with poor employment prospects.

The economy seems to be slowly improving with employment ticking up and growth returning to the housing market, and these forces could unleash an army of basement dwellers into the economy.
Household Shortfall and Giving a Push The Federal Reserve estimates that the Great Recession cost the US about 2.6 million households by 2011. The 18 to 34 group alone had a shortfall of 1.9 million. This is both a blessing and a curse. We can expect some benefits as household formation catches up and housing demand normalizes around the growth. However, it takes time for households to form, and there could be interruptions in the process. Another recession or shock to employment could severely shake the confidence of these consumers. The recession had a direct impact on the formation of households through its effect on the labor and credit markets. Tighter credit markets forced individuals to save longer for the necessary down payment for housing, or to build credit histories where none were previously necessary. The difficulty is exacerbated for young adults, especially those with less than a college education. Young adults are also at a much greater disadvantage when it comes to employment. At the end of 2012 the US unemployment rate was 7.8 percent. But the unemployment rate for people between 16 and 19 is 23.5 percent, 20 to 24 sits at 13.7 percent, and 25 to 34 sits at 7.7 percent. While the economy is improving, it will take some time for the improvements to work their way
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down the employment ladder. Up to a point, the prospects for employment become better with age, as skill development and training make workers more attractive to employers. Thus, the unemployment rate declines to 6.6 percent for ages 35 to 44 and to 5.8 percent for ages 45 to 54, which in turn builds confidence for individuals across time and makes independence less risky. Employment prospects and wages improve with educational attainment, and higher wages and job security are important for fostering household formation. A person who graduated from college or beyond is more than 1.6 times as likely to leave their parents home. Not surprisingly, there is also a correlation between earnings and leaving homeas earnings rise, the chance of creating a household rises. This is intuitive but illustrates the importance of being able to afford the move to independence. For instance, part of the reason for moving into the home after college is to reduce the costs of looking for work. And those with a college degree have less difficulty finding a job match, and therefore have the ability to leave more quickly. This supports the idea that, for many, living at home (or moving back) is a way to get their feet under them and meant to be a temporary arrangement. The Great Independence Move 2011 saw 1.1 million households created. A continued bounce will require employment and wage growth and stabilization in housing prices. The current Federal Reserve policy aiming to reduce unemployment to 6.5 percent in the aggregate is a positive for household formation, as it should bring down the rate somewhat even for the younger brackets and educational groups. But for the economy, it also matters what kind of households are formed. There is a difference in the spending power, and therefore economic relevancy, of the mean household. Family households have mean incomes of nearly $80,000 with married couples pulling in a mean household wage of $91,000. The mean nonfamily household income is about $44,000 with female headed households making $38,000 and male headed households $50,000. Granted, these are not representative of younger households which will typically have lower than the mean income for their group, but it does indicate a general trend. Families have much more spending power, and have more of an impact versus the creation of a nonfamily house-

Much like the average age of a first marriage, the increase in the number of people living with their parents is neither new nor an isolated trend.

A person who graduated from college or beyond is more than 1.6 times as likely to leave their parents home.
hold. There are more nonfamily households being formed on average than family at the moment, and this is unlikely to change dramatically in the near-term. According to the Census Bureau, from the end of 2007 to the third quarter of 2012, the US home ownership rate declined from 68.6 to 65.3 with the 35 and under age group falling from 41 to 36.3. Also significant is the shift from owner to renter occupied housing with owner occupied units declining 175,000 contrasted with 1.321 million newly occupied rental units between the third quarter of 2011 and the third quarter of 2012. The benefits of the Great Independence Move may be disproportionately skewed to rental property, as credit continues to need repair, lending standards remain high, and high earning households only slowly begin to form at pre-crisis levels. The benefits to the economy, from housing to furniture sales, have the potential to be tremendous. First, though, the kids need to move on out.
Sources: Census Bureau; Federal Reserve Economic Database; Pew Research Center, The Boomerang Generation, Parker; Economic Downturns and the Failure to Launch: The Living Arrangements of Young Adults in the U.S. 1995-2011, Mykyta; Sharing a Household: Household Composition and Economic Well-Being: 20072010, Mykyta and Macartney; Household Formation and the Great Recession, Timothy Dunne; The Effects of Housing Push Factors and Rent Expectations on Household Formation of Young Adults, Di and Liu; The State of the Nations Housing 2012, Joint Center for Housing Studies of Harvard University.

SAMUEL RINES is an a nalyst and Economist at chilton capital m anagEmEnt in houston, tExas. dirEct quEstions or commEnts to: srinEs @chiltoncapital .com ZACH BECk is thE E ditor of chilton currEnts and an opErations spEcialist at chilton capital m anagEmEnt in houston, tExas. for furthEr information on chilton capital m anagEmEnt stratEgiEs and sErvicEs, plEasE contact christophEr l. K napp, cKnapp@chiltoncapital .com for rEprints contact srinEs@chiltoncapital .com www.chiltoncapital .com/currEnts