Not only are the numbers of young people over 18 who live with their parents reaching unprecedented numbers, higher than previously assumed, they are not necessarily moving out when their financial situations improve, a according to a new study by Federal Reserve economists that may have important ramifications for housing marks.
The fraction of young adults residing with parents has reached a historic high of 36 percent. This new trend has grabbed the attention of journalists and policy makers alike, who have popularized terms like the “boomerang generation,” referring to young adults who move back in with their parents after having lived on their own. Young adults who “boomerang” are generally described as unable to live independently due to poor economic outcomes. Debt, and particularly student loans, among young adults has also expanded substantially over the past decade.
Nearly 40 percent of young adults carried student loans in 2010, up from 26 percent in 2001, and aggregate student loan balances have exploded in recent years, exceeding $1 trillion in 2013. The fraction of young adults living at home rose from 31.3 percent in first quarter of 2005 to 35.9 percent in first quarter of 2014.
Economists Lisa J. Dettling and Joanne W. Hsu found that increased indebtedness and problems managing debt – as measured by larger account balances, falling credit scores and delinquency on account(s)– increase large numbers of young people who return home to live with their parental co-residence. Between 2005 and 2013 increases in student loan debt and delinquency and declines in credit card and auto debt account for 30 percent of the increase in flows into co-residence with parents and 26 percent of the increase in median time young people spent in co-residence.
However, less debt does not necessarily lead to a return to independent living. “In fact, it seems highly likely the decision to move out will be more nuanced and idiosyncratic than the decision to move in: a period of financial distress may force an individual to move in with a parent, but a return to financial solvency does not necessarily force, or even create a sense of urgency for an individual to move out,” they said in a paper published last month by the Federal Reserve.
Large debt balances can actually shorten the time young people spend at home. The study found that young people with larger student loan and auto loan balances decrease the duration of time spent at home: a $10,000 increase in loans decreases the duration of co-residence by 1.5 percent for student loans and 4.9 percent for auto loans. Credit card balances also slightly reduce the time spent at home, though the effects were not precisely measured. Similarly, for each loan type, being current on payments reduces the duration with parents by 10 to 18 percent, relative to not having that loan type.
For student loans, each loan status reduces durations in co-residence relative to having no student loans– except for severe delinquency. Delinquency of 90 days or more, however, is associated with a 7.5 percent increase in the duration in co-residence. A student loan in deferment increases time spent in co-residence relative to being current, but durations are still almost 10 percent lower than those without student loans. This indicates that deferment enables a young adult to reduce the length of time spent in co-residence, relative to those who become severely delinquent during the period of co-residence.
For auto loans, severe delinquency increases time spent in co-residence relative to mild delinquency and being current. For credit cards, being current and being seriously delinquent have similar effects on the duration.
The researchers found that that, after moving in, lower credit scores and delinquency both increase the time spent in parental co-residence, while larger balances decrease time spent in co-residence.
While delinquency and low credit scores increase time spent in co-residence, holding any debt and having a larger balance reduce time spent in co-residence. We interpret this result as indicative that the accumulation of debt itself is not necessarily problematic for young adults, and in fact, borrowing prudently may enable a young adult to exit co-residence more quickly,” they concluded.
This suggests that residing with a parent and borrowing are both important consumption smoothing mechanisms. Interestingly, the point estimates on the measures of local economic conditions indicate that neither unemployment rates nor house prices have statistically significant or economically meaningful effects on the duration of co-residence. This indicates that after moving into co-residence, short term changes in the local economy exert no effect on young adults’ decisions of when to move out. One possible explanation is that young adults do not look for jobs or to buy homes in the areas where their parents live.
“Overall, we find that the changing debt portfolios of young adults over this period – characterized by rising student loan debt, and declines in credit card, auto and mortgage debt – can explain 30 percent of the observed increase in flows into co-residence, and 26 percent of the observed increase in time spent in co-residence. We interpret these results as evidence that parental co-residence is used as a consumption-smoothing mechanism for weathering period,” they wrote.
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