Entering adulthood during the Great Recession and recovery has not only affected Millennials’ schooling and employment decisions, but also their housing and household formation patterns. In the aftermath of the Great Recession, the share of 18 to 34 year-olds living with their parents increased from 28 percent in 2007 to 31 percent in 2014 – which is a notable increase even if the actual magnitude falls well short of some popular perceptions. Correspondingly, the pace of household formation is low and the “headship rate” among Millennials – the rate at which Millennials head their own households – has fallen. With fewer Millennials as independent renters or homeowners, the demand for housing and the pace of residential investment is likely lower than the level implied by more typical rates of household formation and headship.

Figure 29

Share of 18 to 34 Year-Olds Living with Parent

Source: Bureau of Labor Statistics; CEA calculations.

As discussed in Fact 3, Millennials have stronger relationships with their parents than previous generations and parents of Millennials are much more involved in their children’s lives. Perhaps it is not surprising that a generation that values living close to their families as much as Millennials would also be somewhat more likely to live with their parents as adults, particularly in an economy that is still recovering from a large recession.[56] Moreover, the increased enrollment of Millennials in college as discussed in Fact 4 may contribute to a rising share of Millennials living at home, as students often rely on their parents for housing and other financial support.[57]

The labor market is another factor contributing to the increased number of young adults living at home and the concurrent decline in headship. The rapid decline in the unemployment rate in recent years has somewhat boosted the headship rate and is putting downward pressure on the share living with their parents. Historically, the headship rate has had a significant cyclical component: since the 1970s, the headship rate among young adults has generally tracked their employment-to-population ratio closely.[58]

Figure 30

Headship Rate and Employment-to-Population Ratio for 18 to 34 Year-Olds

Source: Bureau of Labor Statistics; CEA calculations.

This cyclical relationship also holds at the state level: states with the largest increases in the unemployment rate relative to their averages before the Great Recession registered the largest declines in headship rates on average. With parents helping their children in times of labor market adversity, the majority of young adults living at home report that their own financial situation has improved.[59]

However, the share of Millennials living at home has increased even among those with jobs, which points to a role for factors outside the labor market. For instance, research suggests that increases in rents across many metropolitan areas during the Great Recession are likely to have depressed headship.[60] Moreover, the non-monetary costs of living at home may have decreased, again highlighting the role of the relationship between Millennials and their parents in explaining the former’s housing choices. Today’s parents report having fewer serious arguments with their children in their late teens than they had with their own parents at the same age. One in ten parents with children ages 16 to 24 say they “often” argue with their kids, while almost twice as many adults over 30 report often having major arguments with their own parents.[61] Similarly, increased interaction with family does not appear to have a deleterious effect on the quality of Millennials’ family ties. A recent survey found that Millennials living at home are just as satisfied with their family life as those who are not living at home.[62]

Consistent with lower headship rates, young adults today are less likely to be homeowners than young adults of previous generations. The decline in homeownership among Millennials, however, only looks particularly sharp when compared to the homeownership rates of 18 to 34 year-olds during the housing boom. Not surprisingly, the housing boom attracted a particularly large share of 18 to 34 year- olds relative to historical trends.

Figure 31

Probability of Owning a Home for 18 to 34 Year-Olds

Source: Bureau of Labor Statistics; CEA calculations. Note: Long-run trends are estimated using a smoothed weighted average over a 15-year moving window.

Taking a longer view, the lower likelihood of homeownership among Millennials today is largely in line with longstanding declines in homeownership among young people. While disentangling the factors contributing to contributing to the lower likelihood of owning a home in recent years is difficult, at least three forces appear to be at play. First, the gradual shifts in labor force participation, increased college enrollment, and delayed marriage discussed earlier in this report suggest that Millennials are delaying homeownership until they grow older, rather than substituting away from homeownership altogether. Millennials’ stronger relationship with their parents and the accompanying reduction in headship reinforce this trend. It is likely for the Millennials living with their parents to first become renters before becoming homeowners, following the usual path to homeownership.

Second, the more recent decline in the probability of homeownership for 18 to 34 year-olds is strongly tied to the challenges in the labor market for Millennials due to the Great Recession that are discussed in Fact 9. However, homeownership decisions are often tied to job prospects and with the labor market recovery well under way for Millennials, maintaining flexibility in their location decisions as renters could provide an advantage as they consider the job opportunities that come their way.

Lastly, today’s tight lending environment may also be to blame. The share of those under age 30 with credit scores below 680 – a lower credit score on the spectrum from 300 to 850 – is approximately 67 percent, whereas this portion of the credit score distribution is less represented among older age groups. With regulatory constraints leading lenders to apply additional credit overlays for those with low credit scores, Millennials are likely to face challenges obtaining mortgage credit. Survey evidence collected by the Federal Reserve Bank of New York suggests that about 22 percent of borrowers with scores below 680 may decide not to apply for mortgage credit in the first place, perhaps because they feel discouraged by a prior rejected credit application, the lending environment, their employment prospects, or the financial burdens of paying down other debt.[63]

Figure 32

FICO Distribution of Individuals by Age Group in 2013

Source: Federal Reserve Bank of New York.

It is worth mentioning that some observers suggest that rising student loan debt burdens are dimming homeownership prospects for Millennials.[64] For many reasons, including the fact that their returns to education are still to be realized, it is too soon to draw firm conclusions about the long-lasting effects of the increase in aggregate student loan debt on homeownership. Several considerations suggest that the effect is likely to be concentrated in a small minority of Millennials who have student loan debt and are considering buying a home today. For one, because the presence of student loan debt generally “thickens” a credit record, providing more information about a person’s payment history, and thus increases credit scores, the vast majority of those who are able to manage their payments and pay their loans on time preserve their access to credit, and many may even see their credit scores improve. Moreover, delinquencies on all types of credit have been steady in recent years, suggesting that, for some, the negative effect of missed student loan payments is somewhat offset by making consistent payments on their credit cards or auto loans.[65] Consistent with the fact that overall delinquencies have not been increasing in recent years, average credit scores among young adults have remained relatively constant. Lastly, research suggests that the extent to which higher student loan indebtedness is crowding out saving for a down payment appears to be modest so far, in part due to the higher returns to education facilitated by borrowing for college.