Wednesday, June 07, 2006

Family Values



School's out for summer. For lots of college students that means moving back in with the parents. It may seem uncomfortable, having led the hedonistic college life, to move back into the room with your old little league trophies. But something even weirder may await you in a few years.

Your parents may move in with you.

According to an article in the New York Times, "multigenerational households"--those with three or more generations under one roof--are the fastest-growing type of housing arrangement in the United States, especially in places like California where skyrocketing housing costs force families to pool their resources. Also driving multigenerational household growth are working single mothers, whose own mothers often move in to care for the children during the workday.

Housing markets are responding to the demand for multigenerational households. Architects are designing larger houses with separate entrances, big kitchens for "social networking," and lower light switches "so they can be reached both by those in wheelchairs and by children."

In many ways, this trend corrects the inefficiency of living arrangements in the latter part of the twentieth century. Consider a family with three generations: a husband and wife who each have jobs, their two children, ages 1 and 3, and the wife's parents. Suppose the family has two options:

1) The grandparents live in a 900-square-foot apartment that costs $1,200 per month; the married couple and their kids live in an 1,800 square foot house that costs $2,000 per month; the children are in day care at a total cost of $800 per month.

2) They all live together in a 4,000-square-foot house that costs $3,000 per month; the grandparents look after the children, so they don't need to go to day care.

Which is more efficient? The total cost of the first option is $4,000 per month, and the total living space is 2,700 square feet. The total cost of the second option is $3,000 per month, and the total living space is 4,000 square feet. At first glance, therefore, it may seem that the second option, with more space at less cost, is more efficient.

Does that mean that the grandparents should move in with their daughter? Not necessarily. It's not unreasonable to assume that people derive utility from being the head of their own household; sharing a living space isn't easy under the best of circumstances. Couples and their parents often have differing views on the best way to raise children/grandchildren, and these tensions will probably intensify if they live under the same roof. By the same token, people may prefer to have their own parents watch their children, rather than hire a nanny or send the kids to all-day preschool. The saved money can be used for other things--like a vacation away from home. In short, it's only efficient for the grandparents to move in if the net psychic costs and other inconveniences are worth the benefits of the extra living space and saved cash.

1. Suppose that, as housing prices rise, more people form multigenerational households. What implication does this have on the demand for apartments? For large homes? If you were to speculate in the real estate market, how would this article affect your optimal long-term portfolio?

2. Some of this phenomenon is driven by the fact that the baby boomers are retiring. What is likely to happen to the housing market in twenty years, as the boomers pass away? How might this affect their children's willingness to share a large house with them now?

Topics: Housing markets, Efficiency

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