The average student loan borrower knows first hand how difficult it can be to buy a home when saddled with student debt.
In many ways, these are the lucky borrowers. Some student loan borrowers haven’t even bothered to apply for a mortgage because homeownership is nothing more than a dream with little chance of ever becoming reality.
Today we are going to try to answer two very important questions:
- How does student loan debt affect a borrower’s ability to buy a home?
- What is the collective impact of student loans on the housing market?
The numbers tell a very bleak story.
Symptoms of the student debt issue on the housing market… the Statistics
More and more children are living at home with their parents.
A decade ago just 12% of 25-34 year olds lived at home. That number has jumped to 17%. Things are even worse for males in this age group. More than 1 in 5 men age 25-34 are living at home. This is the highest percentage since the great depression.
Living at home isn’t the only housing change caused by student debt. Many graduates burdened by large student loan balances have fled to urban areas to seek higher-paying jobs. The loss of youth and of educated workers has hurt rural areas.
Some might argue that these changes in behavior can be attributed to factors outside student debt. To be fair, there certainly isn’t one single factor driving the numbers. That being said, there should be no dispute that student loans are a significant contributing factor.
A study by the United States Federal Reserve found that 400,000 would have bought homes in the last year, but did not because of student loans. A separate real estate group study pegged the number at 414,000. The real estate group calculated that the lost home sales totaled $83 billion. According to Director of Research Rick Palacios, the numbers understate the severity of the problem, “We actually think it’s pretty conservative,” he explained. “We’re only looking at people age 20 to 40. We know there’s a big chunk of households over age 40 who have student debt, too.”
Why student debt is a problem for everyone
A basic understanding of supply and demand is all that is necessary to understand the devastation to the housing market.
When people can’t buy homes because of their student loans, there is less demand for houses. Fewer buyers mean lower prices and more homes sitting on the market.
Going beyond simple supply and demand economics, the problem spirals out of control where a weakened housing market causes even more student debt according to researchers Gene Amromin of the Chicago Fed and Janice Eberly and John Mondragon of Northwestern University: “We find that as parents are unable to borrow against home equity, they push the burden of financing college enrollment onto students through student loans.”
In the United States, where consumer spending drives 70% of the GDP, student loan holders are poor consumers. For example, a $10,000 increase in student loans decreases the likelihood of homeownership in early adulthood by 5.7 percentage points and reduces the likelihood of having an auto loan by 6.5 percentage points.
Simply put, when a large portion of Americans are severely impacted by a financial hardship, everybody suffers the consequences.
How Student Debt Affects Individual Borrowers
Most borrowers view their student loan debt in terms of how much they cumulatively owe. In total Americans owe over $1.6 trillion on their student loans.
When it comes to buying a home, an individual’s total student loan balance isn’t the main issue. The number that most lenders care about is a mortgage applicant’s debt-to-income ratio or DTI. These calculations are based upon what a borrower is expected to pay each month on their loans.
Looking at student debt burdens from the monthly perspective like mortgage companies sheds some light on ways that more student loan borrowers can participate in the housing market. Obviously, student loan forgiveness plans would be a huge boost to both individuals and the housing market. However, smaller steps to help borrowers’ monthly balance sheets could also help.
If student loans had lower interest rates, monthly bills would be smaller and more borrowers could qualify for a mortgage. In fact, if the forgiveness proposals fail to become reality, there are still many steps the government could take to make life with student loans better.
The other big problem facing student loan borrowers is saving for a down payment. With high-interest student debt, leaving money in a savings account earning 1-2% makes little sense. Not having money for a down payment means many borrowers never even consider the possibility of buying a home.
The good news for borrowers is that there are a number of strategies that can be used to help make the dream of homeownership a reality.
Many Americans see student loans as someone else’s problem.
The reality is that student debt is a far-reaching drain on the economy. Addressing these issues may not be easy or cheap, but it is in the best interests of everyone.