“Adulting” is getting harder for younger generations, which is keeping the housing market from reaching its full potential, according to Freddie Mac’s March Insight report. The report compares young adults to previous generations and the impact to household growth.
“For today’s young adults, ‘adulting’ is hard because the economic environment has been tough in recent years; wage growth has been weak and housing costs have risen rapidly,” researchers noted, and education and health care costs “have skyrocketed.”
Compared to 2000, the average annual expenditures of young adults in 2016 has jumped 36 percent. The average annual expenditures on health care and education have more than doubled, according to the report.
Housing costs and labor market outcomes are the two biggest factors behind the decline in household formation rates among young adults, according to the insight report. From 2000 to 2016, real median home prices rose by 29 percent. However, young adult per capita incomes increased by only 1 percent. Further, the labor force participation rate for young adults has seen a “substantial decline in recent years, particularly for men,” researchers note.
Millennials are the largest generation since the baby boomers. Nearly 45 million adults aged 25 to 34 lived in the United States as of 2016, according to U.S. Census data. That is 4 million more than those aged 35 to 44. If millennials had formed households at the same rate as young adults in 2000, they would have formed 1.6 million additional households in 2016, according to Freddie’s research.
But millennials have been slower than previous generations to reach milestones such as buying a home, getting married, and having children. Don’t count them out yet, researchers say. Millennials and the generation after them, Generation Z, are expected to add between 19 million and 21 million net new households by 2025.
“We expect that as life progresses and today’s young adults age, they will add around 20 million households to the U.S. economy, driving housing demand over the next decade,” says Len Kiefer, Freddie Mac’s deputy chief economist. “But housing costs are a major factor holding back young adult household formations. Our research results indicate that 28 percent of the decline in young adult household formation is due to housing costs. If housing costs continue to rise, we could see about 600,000 fewer households over the next decade.”