Student loan debt has hit record levels, reaching approximately $1.2 trillion—an almost threefold increase since 2005 that surpasses our collective credit card debt. With such levels of debt and significant levels of unemployment and underemployment, people are having an increasingly difficult time making ends meet, much less taking on the extra debt of a mortgage payment. How could the housing market not be affected by this debt?
A new study from John Burns Consulting puts an actual number on the anticipated effect of student loan debt. The group specializes in consulting advice to homebuilders, and they estimate that 414,000 home sales will not take place in 2014 because of the student loan debt burden. That includes sales of both new and existing homes.
Even worse, the survey only covers people between the ages of 20 and 40. Surely, some potential homebuyers in their 40s are dealing with residual student loan debt. We know seniors are.
If the Burns report is accurate, student debt has removed around 8% of potential sales from the housing market, or approximately $83 billion. The study estimates the reduction in purchasing power caused by at least $250 in monthly student loan payments to be $44,000.
This appears to be one factor in the housing market’s uneven performance over the past few years. People cannot move up to larger homes if there is insufficient demand to buy starter homes. Demand is there in terms of people who wish to be homeowners, yet the combination of recent crackdowns on credit and debt burdens (student loans included) render them unable to fill the demand. The effect cascades through the entire housing market.
The Burns report joins a list of studies that are finding connections between student loan debt and effects on housing. The National Association of Realtors previously linked student debt and low levels of first time buyers, and a California Association of Realtors survey found that only 28% of homebuyers were first-time buyers in the previous year, down from a typical 38%.
A New York Fed study found that of 30-year old homeowners, the greater percentage did not hold student loans, flipping the typical scenario where college graduates generally earn more and are therefore more likely to be homeowners.
In essence, potential homeowners with higher education are being squeezed out of the housing market by those with lesser education and lesser salary but with far less debt.
Not only is the overall volume of debt a problem, but rising interest rates have worsened the problem. Fortunately, Congress recently amended the interest rate for Stafford loans, which were set to double in 2013 from 3.4% to 6.8%, or even more potential homeowners would throw in the towel.
The compromise approach indexed the rate to 10-year treasuries, resulting in a rise to 3.86% and subsequently to 4.66% for the 2014-2015 academic year. Sen. Elizabeth Warren (D-Mass) is proposing legislation to allow those with student loans to refinance at the currently lower market interest rates, and other legislators are attempting to address this problem through either the refinancing side, loosening of credit, or some form of partial debt forgiveness.
Meanwhile, the housing market struggles to recover fully from the crisis of the last decade. Regardless of legislative stopgaps, it is unlikely to recover fully until the overall economy picks up enough to raise wages and increase the number of jobs – and even then, there should be a time lag as those holding student debt dig out enough to be able to rethink their dream of home ownership.
Find out quickly at what rate you can refinance your student loan.