Balance Sheets of Young Adults (Discussion)

1. Balance Sheets of Young Adults(Discussion) Steven Fazzari Washington University

2. Broad Question—Connects Papers • Have recent economic problems significantly compromised the relative financial position of young adults? • Lack of financial independence; moving in with mom and dad • Expect a rough 2010, key question is whether it’s worth for the young.

3. Dettling - Hsu • In depth look at balance sheet conditions of young adults • SCF data for “Millennial Generation” • 2001 to 2010; age 18 – 31 • Two dimensions for comparison • Adults; age 35-50 • “Generation X” when they were the same age (1989 SCF)

4. Key Findings • 2010 decline in new worth at 75th percentile • Also (likely correlated) decline in NW for college educated • Virtually no effect at median or 25th percentile; little to lose • Higher NW percentiles much worse in 2010 than in 1989 • Debt substantially higher during peak of housing boom, but just at 75th percentile • Student loans: greater share of group has student debt; and value higher, conditional on having such debt

5. Is This Mostly About Housing? • Big rise in share of home ownership during bubble years • 2001: 28% -- 2007: 42% -- 2010: 36% • Most interesting variation in financial data at the 75th percentile (or higher) • About 35% of young adults own homes • 2010 decline in net worth • Rise of debt in middle 2000s • Consider data splits by home ownership status

6. A Data Question • Household unit, different numbers (N) of co-habitating adults • Probably N=1 and N=2 are most important numbers • Measures divided by N • Is the net worth of a couple effectively half that of a single person? • Answer depends on why we care about net worth? • Home purchase and retirement: dividing by N perhaps extreme • Autos: N may be close to correct • College saving: couples may need more net worth per capita if they have children • Conclusions likely robust; might want to explore a bit

7. Emmons – Noeth • Young people are more reckless and impatient • Young people make more financial mistakes • Because they are more reckless and impatient? • Also, they are less experienced • Also, they may be less reliable or have higher income variance, leading to higher loan rates • Young are more leveraged, less liquid, have greater housing share in assets • Would we expect anything different? Is this a problem?

8. Home Ownership and Finance • Rise in home ownership rate greatest among the young (1994 to 2006) • Lower rate to begin with => more room to grow with financial reform during the housing finance boom • That’s the point: financial reform, that may have been ex post harmful, affected the young more • Also, the young created a market that contributed to making aggressive housing finance profitable • High share of young in a region makes housing more volatile

9. Generational Income Comparisons • Result: Best time to be born for income and welathwas 1930 to 1950 • Why? • Robust economy in early-earning years • Start at a high level • Growth profiles preserve initial level differences • Accumulate assets earlier • What about unexpected inflation and housing debt?

10. Did the Great Recession Compromise Young Adult Finances? • What do these results tell us? • Debt and financial fragility • Who holds debt? (Look at debt/income; loan/value) • Leverage and risk: during bubble young bought proportionally more “house on margin” • Balance sheet vs. income statement (stocks vs. flows) • Importance of financial / housing wealth vs. future earning power • What really compromises young adults economic prospects? • Unemployment: loss of income and persistent drop in future earnings • Slower wage growth: PV loss of $30,000 growing at 1% vs. 2% exceeds $200,000