Younger Americans making riskier investments, nonessential purchases for tragic reason

Younger generations are making riskier investments and spending more recklessly as they give up on the American dream of owning a home, a new study suggests.The research from Northwestern University’s Seung Hyeong Lee and the University of Chicago’s Younggeun Yoo published in their study, “Giving Up”: The Impact of Decreasing Housing Affordability on Consumption, Work Effort, and Investment,” showed the sharp decline in housing affordability in recent decades. The duo developed a model that suggests that the cohort born in the 1990s will reach retirement with a homeownership rate roughly 9.6 percentage points lower than that of their parents’ generation.It also shows that as a household’s perceived probability of attaining homeownership falls, it systematically shifts its behavior, such as spending a larger share of income or wealth on consumption, reducing work effort and taking on riskier investments.“We find that, among households with net worth below the median U.S.house price, renters tend to spend more on credit cards, exert less effort at work, and participate more in cryptocurrency markets relative to homeowners with similar wealth,” the researchers wrote.Renters with relatively low wealth exhibit the same patterns, according to the report.

Over time, the authors suggest, these patterns of behavior will compound, causing much bigger wealth gaps between those who keep trying to buy a home and those who give up on the idea.Lee and Yoo recommended offering a subsidy to help the largest number of young renters avoid giving up on trying to move ahead.This approach, according to the authors, will improve people’s well-being far more than giving everyone the same amount of money or targeting only the poorest 10%.It also helps more people buy homes, encourages work and reduces the need for government support.Buying a home has become dramatically harder for the average American over the past several years.

The affordability crisis began in ...