Goldman: “What’s Keeping the Kids at Their Parents’ Homes?”

A few excerpts from a research note by Goldman Sachs economists David Mericle and Karen Reichgott: What’s Keeping the Kids at Their Parents’ Homes?

The share of 18-34 year-olds living with their parents rose about four percentage points (pp) during the recession and its aftermath, resulting in a few million extra “kids in the basement.” This group accounts for the bulk of the recent shortfall in household formation and represents a potentially large pool of pent-up demand for homebuilding. While the share of young people living with their parents began to decline in 2014, the decline has stalled over the last six months …

To what extent do current labor market conditions explain the elevated rate of young people living with their parents? … We find that this current labor force status “composition effect” accounts for about 1.3pp, or roughly one-third of the “excess” kids living with their parents.

What accounts for the rest? Part of the explanation is likely that the legacy of the recession wears off only gradually …

Three other factors might also have played a role. First, researchers at the New York Fed and the Fed Board have found evidence that rising student debt and poor credit scores have contributed to the elevated share of young people living with their parents. Second, the median age at first marriage has increased at a faster than usual rate since 2007 … Third … rent-to-income ratios are at historic highs, especially for young people. The future trajectory of these three factors is less clear, suggesting that the share of 18-34 year-olds living at home might not fully return to pre-recession rates.

What are the implications for the long-run homebuilding outlook? The pool of “excess” young people living at home is so large that even if only two-thirds ever move out and even if this process takes another decade, trend household formation would likely fall near the upper end of our 1.2-1.3mn forecast range. Combined with a 300k annual rate of demolitions, such a scenario would imply a trend demand for new housing units of about 1.6mn per year, well above the current sub-1.2mn run rate of housing starts. As a result, we continue to see plenty of upside for residential investment.

Related posts

Idiocy in Spain: Bank Proposal to Build More Houses, Issue More Mortgages, Despite Massive Inventory and Enormous Drop in Sales

Mish Global Economic Trend Analysis

Sky City: China to Build World’s Tallest Building, 220 Stories, in 90 Days

Mish Global Economic Trend Analysis

It’s No Wonder People Don’t Understand the “Public” Debt

Angry Bear

EU Budget Laugh of the Day “No One Is Discussing Quality”

Mish Global Economic Trend Analysis

Via Barry Ritholtz’s  Big Picture comes this PBS six minute …

Angry Bear

Politics and Specific Policies

Angry Bear