Aug132013

Millennials: pent-up housing demand or lost generation?

An astonishing number of the 18-31 year age cohorts are living with their parents. This large group of young adults are not currently forming new households and stimulating housing demand. When they finally move out — if they ever move out — they will demand either rental housing or an ownership stake. Which way they go will have an impact on future house prices.

Millennials, in Their Parents’ Basements

By CATHERINE RAMPELL — August 1, 2013, 11:00 am

Last year, a record 36 percent of people 18 to 31 years old — roughly the age range of the generation nicknamed the millennials — were living in their parents’ homes, according to a new Pew Research Center analysis of Census Bureau data. That compares to 32 percent of their same-aged counterparts in 2007, the year the recession began.

Notes: “Living at home” refers to an adult who is the child or stepchild of the head of the household, regardless of the adult’s marital status. Source: Pew Research Center tabulations of March Current Population Survey  Integrated Public Use Micro Sample.
As you can see from the data above, the percentage of people in this age group living at home has always been quite high. The recent uptick is significant, and the percentages are reaching new records, but an improving economy — assuming we ever get one — will provide economic opportunity for many of these young people to get out of their parents house and form new households.

And despite the frequent stories of recent college graduates stuck on their parents’ couches (or in their basements or above their garages), it is actually young people without bachelor’s degrees who are most likely to be living at home. The survey data, by the way, counts people who are living in college dormitories as living at home with their parents.

Notes: “Living at home” refers to an adult who is the child or stepchild of the head of the household, regardless of the adult’s marital status. Source: Pew Research Center tabulations of March 2012 Current Population Survey Integrated Public Use Micro Sample.

Younger millennials (those 18 to 24) are more likely to be counted as living with their parents, partly because they are more likely to be in school.

Being unemployed is the biggest factor associated with living with one’s parents, not surprisingly. But there are other demographic traits that correlate with living with one’s parents, including being male. Young men are more likely to live at home even though they are now less likely to be in college than young women are.

I know a local family who is dealing with their 20-something son who doesn’t want a job and still lives at home. They finally gave him an ultimatum to get a job and move out within 30 days. He steadfastly refused to go look for work and called their bluff. The family packed his belongings, put them on the front steps, and changed the locks. He has since moved in with some friends. Only time will tell if he is motivated to find a job or if he will seek out new benefactors when his welcome wears out.

Notes:

One reason that both genders have become more likely to live with their parents is that marriage rates have fallen — both during the recession and in the decades before. A very tiny share of millennials live with their parents once they are married (about 3 percent in 2012).

It’s hard to get a date much less a wife if you’re unemployed. I’m not surprised the marriage rate declined.

In any case, these higher rates of living with parents have contributed to the unusually low household formation seen in recent years.

Jed Kolko, the chief economist at Trulia, recently estimated that low household formation rates had led to 2.4 million “missing households.”

That’s equivalent to more than two years of normal household formation that have gone missing,” Mr. Kolko wrote.

These “missing households” can hold back the economy. With new households, after all, come furniture purchases and other kinds of consumer spending. Mark Zandi, chief economist at Moody’s Analytics, has estimated that under normal circumstances, each formation of a household adds about $145,000 to output that year as the spending ripples through the economy.

I came across this article in a homebuilder newsletter touting this as pent-up demand. But is it really?

First, most of these people are uneducated and unemployed. Even when they find a job, they are likely to rent an apartment, perhaps for a very long time. They certainly aren’t going to be in a position to buy a house any time soon, if they ever do.

The ones who are college grads may find higher paying jobs when they leave the nest, but those people also generally have copious amounts of student loan debt. Perhaps they will contribute some single-family home demand in the form of rental housing, but it may be many years before they are in a position to buy either.

Eventually, this age group will be in a position to buy a house, but it will be much, much later than the generation that had access to no-money down mortgages and liar loans. For those that believe this pent-up housing demand will propel house prices ever higher, this demand may remain pent up for a very long time.

$2,500 down, $261,000 out

The return on investment people obtained from buying California real estate before the bubble was truly astounding. The former owners of today’s featured property bought a very modest single-family home using an FHA loan back in 1996. Over the next 11 years, they extracted $261,000 in mortgage equity withdrawal. That’s $1,000 they got out for each dollar invested. Now that’s an incredible ROI!

As if that wasn’t rewarding enough, this family was allowed to squat from mid 2009 until late 2012, four and one half years.

Free money followed by free housing; living the dream in California.

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[idx-listing mlsnumber=”PW13159598″ showpricehistory=”true”]

9901 CERRITOS Ave Anaheim, CA 92804

$557,500 …….. Asking Price
$144,000 ………. Purchase Price
8/30/1996 ………. Purchase Date

$413,500 ………. Gross Gain (Loss)
($44,600) ………… Commissions and Costs at 8%
============================================
$368,900 ………. Net Gain (Loss)
============================================
287.2% ………. Gross Percent Change
256.2% ………. Net Percent Change
8.3% ………… Annual Appreciation

Cost of Home Ownership
——————————————————————————
$557,500 …….. Asking Price
$111,500 ………… 20% Down Conventional
4.32% …………. Mortgage Interest Rate
30 ……………… Number of Years
$446,000 …….. Mortgage
$108,839 ………. Income Requirement

$2,212 ………… Monthly Mortgage Payment
$483 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$116 ………… Homeowners Insurance at 0.25%
$0 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
============================================
$2,812 ………. Monthly Cash Outlays

($403) ………. Tax Savings
($607) ………. Principal Amortization
$175 ………….. Opportunity Cost of Down Payment
$159 ………….. Maintenance and Replacement Reserves
============================================
$2,136 ………. Monthly Cost of Ownership

Cash Acquisition Demands
——————————————————————————
$7,075 ………… Furnishing and Move-In Costs at 1% + $1,500
$7,075 ………… Closing Costs at 1% + $1,500
$4,460 ………… Interest Points at 1%
$111,500 ………… Down Payment
============================================
$130,110 ………. Total Cash Costs
$32,700 ………. Emergency Cash Reserves
============================================
$162,810 ………. Total Savings Needed
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