As New Graduates Return to Nest, Economy Also Feels the Pain
Like most of her friends, Hollis Romanelli graduated from college last May and promptly moved back in with her parents.
As a result, she didn’t pay rent — or a broker’s fee or renters’ insurance, for that matter. She also didn’t buy a bed, desk, couch, doormat, mop or new crockery set. Nor did she pay the cable company to send a worker to set up her TV and Internet, or a handyman to hang a newly framed diploma. She didn’t even buy drinks and snacks for a housewarming party.
In other words, Ms. Romanelli, 22, saved a lot of money. But she deprived the economy of a lot of potential activity, too.
Every year, young adults leave the nest, couples divorce, foreigners immigrate and roommates separate, all helping drive economic growth when they furnish and refurbish their new homes. Under normal circumstances, each time a household is formed it adds about $145,000 to output that year as the spending ripples through the economy, estimates Mark Zandi, chief economist at Moody’s Analytics.
But with the poor job market and uncertain recovery, hundreds of thousands of Americans like Ms. Romanelli (and her boyfriend, who also lives with his parents) have tabled their moves. Even before the recession began, young people were leaving home later; now the bad economy has tethered them there indefinitely. Last year, just 950,000 new households were created. By comparison, about 1.3 million new households were formed in 2007, the year the recession began, according to Mr. Zandi. Ms. Romanelli, who lives in the room where she grew up in Branford, Conn., said, “I don’t really have much of a choice,” adding, “I don’t have the means to move out.”
Ms. Romanelli, who works as an assistant editor at Cottages & Gardens magazines, is one of the luckier “boomerang” children who have found jobs and at least can start saving for their own place someday. As of last month, just 74 percent of Americans ages 25 to 34 were working. It is perhaps no wonder, then, that 14.2 percent of young adults are living with their parents, up from 11.8 percent in 2007. Among young men, 19 percent are living with their parents.
But even some young people who can afford to move out have decided to wait until getting on more solid footing. Prudence, not necessity, has kept them at home.
Jay Bouvier, 26, has a full-time job teaching physical education and health and coaching football and baseball at a high school in Hartford, near his parents’ house in Bristol. He could rent his own apartment — after taxes he makes about $45,000 a year, he says — but has decided not to. He says he will stay with his parents until he has saved enough to buy his own house.
“I have it pretty good at home, since it’s so close to my work, and financially I just feel like it’s smarter for the long run to buy,” he said. He says that living with his parents enables him to set aside about half of each paycheck. “It’s like I pay rent, but to myself.”
By not paying rent, of course, he has deprived a local landlord and a host of other local companies of some income, as well as whatever businesses those purveyors might have patronized further down the line. It’s a phenomenon that John Maynard Keynes referred to as the “paradox of thrift”: Saving is good for the individual, but en masse can hurt the economy by reducing demand.
“Increased housing demand definitely has multiplier effects throughout the economy,” said Gary D. Painter, a professor at the University of Southern California and director of research for the university’s Lusk Center for Real Estate. “We have these sort of missing potential households,” he said, which also means “missing” sales and jobs in industries like retail, construction and manufacturing.
The actions of the young are self-perpetuating. Young people are reluctant to set off on their own until they have greater financial stability. But the economic conditions necessary to make them financially secure are difficult to achieve while consumers like them are still too nervous to start making big purchases, on housing or anything else.
Small indulgences are not totally out of the question, though.
“To be honest, for my first few real paychecks I’ve treated myself,” said Ms. Romanelli, explaining that she has not yet begun her plan to salt away half of each paycheck. “It’s only the first month or two, after all.”
Some economists are optimistic that there is considerable pent-up demand for new homes because so many young adults are reluctantly staying with their parents. Several of Mr. Bouvier’s friends, he said, are “itching to get out.” As soon as they find work, he says, they’ll leave.
“Once we get a little bit of job growth, or even expectations of better job market, those households are going to start breaking apart pretty fast,” said Mr. Zandi, of Moody’s Analytics. Household formation probably won’t lead the recovery, but once set into motion by other good economic news it can “supercharge growth.” He estimates that there is pent-up demand for close to 1.1 million new households, which is approximately equal to the number of excess vacant homes for sale and rent.
“If these pent-up households were to form, then the oversupply of housing would be largely absorbed and housing construction would quickly ramp up,” he said.
Mr. Bouvier, now three years out of school, is hoping to move into his own house early next year, ideally a place that he can “fix up and turn into good investment.” He says he’ll hire a construction crew to help with the renovations.
“You know, they really should have kept that tax incentive for first-time home buyers,” he said. “I’m creating jobs after all. I thought that was a good thing.”