So this is another issue on which I wanted to marshal more charts and evidence but at some point its worth it just to make a statement.
If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990.
Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles.
Indeed, the per capita stock of both homes and cars has been shrinking and the actual stock of cars has been shrinking over this period.
However, this will not last. There is nothing about America which says that lifestyles are forever changed. Young people themselves don’t say that in surveys. Firms of all shapes and sizes do not seem to be repeating that perception.
Folks think that this is unusual. That times are tough and people are having to rough it. Not, that it just doesn’t make sense anymore to move out in your 20s.
The more complete economic-y story address how the long term growth path was affected by financial innovation, the resulting deviation and the resulting return.
However, the short, short story is that after the collapse the risk premium associated with loaning individuals money for cars and houses went up and so either interest rates had to go down or marginal returns had to go up. Because interest rates could not go down, marginal returns went up.
Yet, this can only happen if the capital-to-labor ratio falls which is precisely what we mean by saying folks moved back in with their parents.
Still fundamental tastes and technologies have not changed. As the risk premium falls the return will also have to fall which means the ratio will rise, which in turn means heavy production of cars and homes.
We can – and I think have gotten – a clue as to when this is going to happen when the rental rates on these things rise. For homes, we can get that directly by reading rents. For cars we can look at the dynamics of the used car market, which will tell you how much maintenance cost people are willing to put up with.
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Tuesday ~ February 28th, 2012 at 1:39 am
Curt Doolittle
Apologia.
Tuesday ~ February 28th, 2012 at 2:32 am
Steve Waldman
Karl,
Perhaps there has been no change in “fundamental tastes and technologies”, but there has been a serious change in young adults’ financial situation. One might argue that the funds a young adult born in 1970 would have directed to rent payments and transportation have, for a young adult born in 1990, been redirected towards servicing student debt. Prior to 2008, young adults could sustain the 1970 generation’s norms of household formation by refinancing into other forms of debt rather than bearing the full cash flow cost of letting student loans amortize. But that’s become harder and more expensive, so perhaps 1970-generation norms are simply unaffordable for the college graduate born in 1990.
If that’s the case (and it’s only speculation on my part!), then “fundamental tastes and technologies” may very well change. After all, very much of our “tastes” are really just norms we’ve assimilated and rebranded as preferences. For people born in 1970, the preference to not live with parents post-college was very strong for social reasons: living “at home” marked one as something of a loser. But as more and more not-loser-ish people do it, as living with the folks comes less to signal a deficiency of character or coolness, the preference to form an independent household will grow weaker at the margin. Obviously, there are lots of intrinsic reasons young adults to prefer not to live with their parents, and those won’t go away. But the combination of a weaker financial position and a diminished stigma may provoke enduring changes.
Tuesday ~ February 28th, 2012 at 3:38 am
yorksranter
However, SRW, given how important it is that structural social issues must be transformed into individual moral failings, I think it’s a reasonable aim-off to assume that it’s the wages, stupid. Perhaps there’s Something Wrong With The Youth Of Today, but that’s in the same class of proposition as She Was Asking For It – not logically impossible, but very rarely true and generally asserted by liars, and as a result, one that should come with an automatic -100 Bayesian credits.
I have to tell people I know this all the damn time. They paid your dad MORE MONEY, he benefited from free education, and a lot of stuff, notably housing, was CHEAPER. That’s why he had a house and a car and a wife in his 20s. It sucks, occupy everything.
Tuesday ~ February 28th, 2012 at 4:21 am
FT Alphaville » Further reading
[...] What the recession has meant for the cohort born in [...]
Tuesday ~ February 28th, 2012 at 8:55 am
PPP Lusofonia (@ppplusofonia)
Preferences for “living with the old folks” have a lot to do with the relative prosperity of the succeeding generations.
With generous protection to job-holders and pensioners, the job-less young are left out in the cold.
Already in the early 1990′s the French complained that … les jeunes adults s’incrustent chez papa/maman.
But delaying household formation and leaving young men at loose ends can have very severe socio-economic consequences.
Tuesday ~ February 28th, 2012 at 9:04 am
Brooks calls for GOP leadership – Tyler’s AM Reads – February 28, 2012 « Blog of Rivals
[...] Karl Smith takes a look at how 20 somethings moving back home has impacted growth. Share this:EmailTwitterFacebookLike this:LikeBe the first to like this post. ▶ No Responses /* 0) { jQuery('#comments').show('', change_location()); jQuery('#showcomments a .closed').css('display', 'none'); jQuery('#showcomments a .open').css('display', 'inline'); return true; } else { jQuery('#comments').hide(''); jQuery('#showcomments a .closed').css('display', 'inline'); jQuery('#showcomments a .open').css('display', 'none'); return false; } } jQuery('#showcomments a').click(function(){ if(jQuery('#comments').css('display') == 'none') { self.location.href = '#comments'; check_location(); } else { check_location('hide'); } }); function change_location() { self.location.href = '#comments'; } }); /* ]]> */ [...]
Tuesday ~ February 28th, 2012 at 9:20 am
rjs
irregardless of their preferences, that generation cant qualify for home loans because they’re saddled with too much student debt…
& they cant pay down their debt if all they can get is 28 hours of work per week because employers dont want to pay benefits…
Tuesday ~ February 28th, 2012 at 10:49 am
Becky Hargrove
Never in a million years did I think I would need to come back to my parents’ house, for I had been gone nearly 40 years and don’t even recognize old classmates. To be sure my folks can use my help now and so it’s okay. But ultimately I want our economy to improve so that I can live wherever I want, just as before. However I can’t be positive that will happen, and none of us can be sure that it will be possible anytime soon to get back to prosperity as we once defined it. That’s why we need to create new economic zones with sets of rules that allow anyone with initiative and a will to survive, to actually be able to do so. Not just off on some island or other country somewhere. Right here on the mainland.
Tuesday ~ February 28th, 2012 at 5:56 pm
elboku
Karl: Did it ever occur to you that no one has much money? The median wage in America is around 27k; which means that half of our country lives on less than 27k a year. Who can live on that? Where can one live on that? How hard is that to understand? Really, sometimes economists baffle me.
Tuesday ~ February 28th, 2012 at 7:24 pm
Will Student Loans Impact Household Formation? | Rortybomb
[...] Karl Smith gets this right: “If you look across the demographic survey’s what looks to be the biggest effect of the recession has been to delay adulthood for folks born around 1990. Rather than graduating high school or college and getting their own apartment and their own car, they stayed with or moved back in with their parents. This drove down household formation and drove down the demand for automobiles.” The Census webpage has similar thoughts and numbers. Unemployment is the biggest driver of young people not forming households, and as youth unemployment very slowly comes down we should see household formation pick up. [...]