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Housing Markets Suffer as Young Adults Delay Household Formation

Today's young millennials have been slow to reach traditional adult milestones, as compared to previous generations. As compared to the rates in 2000, the average annual expenditures for young adults increased 36 percent in 2016, with expenditures on health care and education more than doubling. These expenses could represent a major obstacle for U.S housing markets, and be a cause for patterns in low rates of homeownership and household formation by young adults, according to Freddie Mac [1]’s Economic and Housing Research group’s March Economic and Housing Research Insight report [2], titled ‘Why Is Adulting Getting Harder? Young Adults and Household Formation.’

Though the U.S. Census Bureau reports nearly 45 million young adults aged 25 to 34 in the United States (over four million more than those aged 35 to 44), this demographic still shows only modest rates of household formation. The headship rate (the rate of heading a household) for young adults was down by 3.6 percent for 2016 as compared to the same demographic group in 2000. If this decline had not occurred, and young adults continued the headship rate of 2000, the U.S. would have experienced an additional 1.6 million households in 2016. Currently, there are about 20 million households headed by young adults.

The young adult demographic in 2016 is shown as reaching milestones traditionally associated with adulthood, such as getting married, starting families, living independently, and forming their own households. Fifteen percent of young adults were living in their parent’s homes in 2016, while one in three adults in the U.S. shared a household with roommates.

There are five notable differences affecting household formation when comparing young adults of 2000 to young adults of 2016: the decline of marriage and fertility rates, the increase of living in central cities where the cost of living is high, the increase in young adult education, the increase in wages earned, and the decline of participation in the labor force.

The report constructed three estimate scenarios predicting how household formations might evolve in the future, with a baseline, optimistic, and pessimistic structure. The baseline structure assumes current trends in terms of economic, sociological, labor market, and housing market factors persist over the next 10 years. The optimistic structure assumes that economic conditions improve by 2025. In this scenario, housing costs remain fixed and vary labor market outcomes. Specifically, the report says, we witness an increase of real personal income for each age and race or ethnicity group by 15 percent, as well as increase the labor force participation and decreasing unemployment levels.The pessimistic structure assumes a deterioration in housing market conditions, assuming that housing supply persists in falling short of demand, while real housing prices rise an additional 20 percent over the next ten years.