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 “Generation X” when they were the same age (1989 SCF)

Key Findings 2010 decline in new worth at 75 th percentile Also (likely correlated) decline in NW for college educated Virtually no effect at median or 25 th 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 75 th 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% : 42% : 36% Most interesting variation in financial data at the 75 th 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? 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