03/02/2012 05:00 pm ET Updated May 02, 2012

Returning to the Nest Is Costly

Has the Great Recession changed the way we live? Given the severity of the economic downturn and the slow recovery, it's a good question to ask. The experience has certainly given pause to those previously expected to be purchasing homes or heading out on their own. Home values remain depressed in many markets, but demand is down along with incomes and job opportunities. This has contributed to a noticeable "return to the nest" phenomenon, where grown children are moving back in with their parents in increasing numbers instead of setting up a home on their own. If the economy doesn't improve more dramatically, they may stay there for a while.

The Census Bureau reports that since the Great Recession began, 7 million more Americans are living in doubled up arrangements. The trend for young adults was particularly dramatic. For persons ages 25 and 34, their rate of living doubled up has increased over 25%. Not surprisingly, this group has fared poorly in the current economy. In 2010, their incomes declined over 9%, the worst performance of any demographic group. When they live in households with other working adults, most are not counted as poor, but if their own income status were considered, over 45% would have incomes below the poverty threshold. On top of that, it's likely that many are saddled with debt, including rising levels of student loans that they can't repay until they start work and begin to generate earnings. It's been pretty tough out there for recent college grads.

This is troubling because there's evidence that the first job a person takes has a large influence on their lifetime earnings. When young adults have trouble finding employment they may settle for a job that doesn't make the most of their talents. Worse still, they may get stuck in those jobs longer than they should and consequently they suffer long-term losses of income. The longer the unemployment and under-employment problem persists, the larger and more permanent the effects.

Our policymakers need to recognize that a poor economy wastes human potential and has real-world costs. When young people stay with their parents for longer periods of time, family formation is delayed, fertility falls and productivity goes down. Now, we certainly can and should celebrate the ingenuity of families who come together in tough times, but the truth is that we are digging a deep hole for an entire generation that will be difficult for them to climb out of. And the rest of us will be impacted as well. Traditionally we count on this cohort of young adults to invigorate our economy, through innovation and rising productivity, let alone from what they buy when they set up a home of their own.

What can be done about it? Incomes certainly need to go up, along with job opportunities. That may be easier said than done but a growing economy -- where prosperity is widely shared rather than restricted to those at the very top -- is a fundamental precondition for future prosperity.

More immediately, we need to help those brought down by the recession get back on track by assisting millions of families to rebuild their balance sheets. To do so, they must lower their debts and build up their savings, so they have a stock of assets to access in times of need or as a catalyst for strategic investments. For many, this can't be accomplished until they can get out from under the debilitating overhang of housing debt. This won't happen unless we allow underwater homeowners to reduce the principal they owe on their mortgage. Future policy efforts should re-envision homeownership as a process that an aspiring family pursues over time, which includes counseling, saving for a downpayment, and connection to an appropriate mortgage product. If policy can support such a process, we can create new flight paths for our little birds to eventually leave the nest and fly toward their own future.