A New York Fed research paper wonders What’s Keeping Millennials at Home? Is it Debt, Jobs, or Housing?
The paper says "it's a mystery" why the housing recovery did not have a bigger impact on millennials living at home.
The research paper, written by Zachary Bleemer, Meta Brown, Donghoon
Lee, and Wilbert van der Klaauw notes correlations to debt, jobs and
housing.
Yet, "student debt only explains about 10% of the increase in parental
coresidence since 2004, with another 10% being explained by house prices
during the mid-2000s".
I have the answer below, but first a few charts and notes on the charts.
Notes:
- CCP is the Federal Reserve Bank of New York’s Equifax-Sourced Consumer Credit Panel
- CPS is the Current Population Survey, a joint effort between the Bureau of Labor Statistics and the Census Bureau
Coresidence 25-30 Year-Olds 1999-2013
Coresidence 25 Year-Olds 1999-2013 Census Corrected
Coresidence 30 Year-Olds 1999-2013 Census Corrected
Residence Arrangements 1999-2013
Student Debt Prevalence
Residence Choices and Economic Conditions
Fed Mystified, Puzzled
Trends towards increasing coresidence started well before the housing boom, and well before the great recession. Most student loan debt has been in the past few years, after the recovery began.
Student debt only explains 10% of the shift with another 10% attributable to housing prices. Here are a few paragraphs from the study that shows the puzzlement.
Emphasis Mine.
Homeownership in the CCP declines from
2005 forward for 25 year olds, and from 2007 forward for 30 year olds,
following steady or modestly increasing youth homeownership rates during
the housing boom. Unlike the aggregate parental coresidence series,
these homeownership trends suggest that early homeownership responded
strongly to the events of the Great Recession. From this perspective,
the decision to stay home with parents appears to be more closely tied
to the student borrowing phenomenon, while housing choices (when not
living with parents) appear to be more closely tied to economic
conditions. The failure of young homeownership to track the housing
market recovery, however, remains a puzzle.
The upward trend in coresidence with parents appears
steady, and suggests little direct relationship to broad economic
indicators such as unemployment measures and the house price index. This
would seem to suggest that the decision to stay home with parents, or
to move back in, relates more closely to the recent changes in the debt
burden of higher education than to swings in youth labor markets and the
cost of housing.
However, the analysis presented in Figure 7 is
unsophisticated, and, as such, poses more questions than it resolves. In
terms of the aggregate trends, the steady increase in coresidence with
parents may reflect not a failure to respond to aggregate conditions,
but offsetting effects of, for example, job and housing markets on
residence decisions among the young. The failure of all youth residence
decisions to reflect the recent recovery in employment and house prices
remains a mystery.
What Did the Study Include?
I had to laugh when I saw pages of text and discussion that looked like this.
Xilt represents a vector of individual i , location l , period t characteristics the levels which may influence the residence choice of individual i at t+1. ... The vector Zc(i)l represents characteristics of individual i's cohort, c(i), and location l that do not vary by t ... The vector of state fixed effects is denoted σs(l). Idiosyncratic error εilt is clustered at the state level. ...
I cannot understand that, nor can anyone but 0.1% of true mathematical geeks. But I am quite certain the formula is mathematically sound.
Yet, at the same time, it is complete nonsense. The results actually speak for themselves. Such formulas only explain 20-40% of what is happening.
The model is clearly broken. Why?
Attitudes
The Fed believes all they have to do is push a button, and people will respond the way they want. The Fed got housing prices up, but only 10% of the response they expected.
Attitudes explain why. The Fed can and did make money available, but it cannot dictate where people spend it, or even if people spend it.
Here is a link to all the articles where I mentioned
Attitudes. There are pages of references. It would behoove the Fed to read a few of them.
Clash of Generations
Unlike boomers and gen-Xers whose primary focus was on money and "getting ahead" lifestyles, millennials have more of a depression-era survival mentality coupled with a completely different set of values.
I have been writing about the implications of changing attitudes since at least 2008.
I wrote about the
Clash of Generations in May 2014 in
Boomers vs. Millennials: Attitude Change Will Disrupt Wall Street and Corporate America.
Major Attitude Shift
Flashback June 25, 2008: This is what I said about attitude changes in
Peak Credit
Secular Attitude Change Underway
There
is a secular attitude change happening right now. Boomers close to
retirement are now (finally) scared to death as the equity in their
houses has been vaporized. School age children are seeing homes
foreclosed, and families destroyed over debt. The American consumer, who
nearly everyone thinks will be back as soon as the economy picks up are
mistaken.
Secular shifts like these come once in a lifetime.
Sadly it's too late for many cash strapped boomers counting on equity in
their houses for retirement.
Lessons Of The Great Depression Forgotten
The
lessons of their great grandfathers who lived in the great depression
era were forgotten. Over time, everyone learned to ignore the dangers of
debt, risk, and leverage. Belief in the Fed and the government to bail
out any problem are ingrained. Bank failures are distant memories.
Anyone
and everyone who wanted credit got it, and on the easiest of terms:
subprime, pay option arms, reckless leverage, and covenant lite debt and
toggle bonds that allowed debt to be paid back with more debt. That's what it takes to hit a peak.
Peak Credit
Peak
credit has been reached. That final wave of consumer recklessness
created the exact conditions required for its own destruction. The
housing bubble orgy was the last hurrah. It is not coming back and
there will be no bigger bubble to replace it. Consumers and banks have
both been burnt, and attitudes have changed.
It
took nearly 80 years for people to get as reckless as they did in 1929.
80 years! Few are still alive that went through the great depression.
No one listened to them. That is the nature of the game. The odds of a
significant bout of inflation now are about the same as they were in
1929. Next to none.
Children whose parents are being destroyed by debt now, will keep those memories for a long time.
Social and Stock Market Impacts
I was wrong about peak credit but everything else I stated was pretty much spot on, including price inflation.
Although peak credit has been surpassed, a substantial portion of the rise in
credit is in the form of student loans that cannot and will not be paid
back without bailouts.
Importantly, millennial attitudes towards cars and other material goods
is not the same as their parents.
As boomers retire, they will need to draw down on both their stock
market portfolios and their savings (assuming they have either).
Economic support from relatively low-paid millennials so that boomers
can maintain their lifestyles will be massive.
Millennials will assist aging boomers via taxation and by overpaying for
Obamacare. Higher taxes coupled with increasing time commitments to
help care for aging parents will take a toll. And because boomers live
longer than ever, the economic drain and time commitment from
millennials will increase every year.
This has downward implications on the economy and the markets,
especially in light of millennial-mistrust in stocks and the massive
amount of student debt many of them carry.
What Did the Study Included vs. What it Didn't
The study looked at debt, jobs, and housing.
"Student debt only explains about 10% of the increase in parental
coresidence since 2004, with another 10% being explained by house prices
during the mid-2000s".
The Study missed changing social attitudes and the demographics of aging parents! Attitudes and demographics explains the 80% miss.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
