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Balance Sheets of Young Adults
(Discussion)
Steven Fazzari
Washington University
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.
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)
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
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
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
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?
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
Generational Income Comparisons
• Result: Best time to be born for income and welath was 1930
to 1950
• Why?
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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?
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