Student Loan Debit & Housing

Housing prices have increased over 9,5 percent from Nov 2019 to Nov 2020 on a national average. Hotspots around the country have seen rapid appreciation like Salt Lake City where prices increase to 17.9 percent in 2020. But, that’s just the edge of a larger problem for Americans struggling to buy a home.

Down payment and stagnant incomes are proving it more difficult for a growing number of would-be homeowners, but another problem exist many may not realize and impacts the housing market in a profound way. 

For those of us fortunate enough to feel secure in our jobs and want to move into larger homes or relocate to move up the job ladder, it’s becoming increasingly more difficult to find homebuyers in a diminished pool. First time homebuyers who have always been major contributors and set the stage for everyone else to move up aren’t coming into the market for one main reason. They owe too much in student loan debt!

If you ask around you find many of your family and friends know someone who can’t buy a home due to student loan debt. Average student loan debt in currently stands at $32,731, and that figure will continue to escalate given the steady and the continuing rise in the cost of tuition and fees.

Although tuitions and fees in 2021 are expected to be the lowest increase in three decades the last decade wasn’t pretty and that’s what all students are working off to pay off their student loan debt. Back in the day, we’ll target 20011 to 2014 Collegeboard.com said costs rose by 2.9 percent for tuition and fees for instate students at public four-year colleges and universities in 2013-14, following increases of 4.5 percent in 2012-13 and 8.5 percent in 2011-12, before adjusting for inflation.

The Federal Reserve estimates that in quarter three of 2020, Americans owed more than $1.7 trillion in student loans — an increase of nearly four percent compared to quarter three of 2019. The decades-long increase in student debt is even more noticeable when compared to decades prior. For every $250 a month in student loans that a household owes, it reduces their power to purchase a home by $44,000. 

Nearly half of Americans (49 percent) who have student loan debt call their college loans the biggest obstacle to buying a home, even over the lack of a down payment or job security. Women are particularly affected, as they represent 58 percent of all student loan debt holders.

Earning a postsecondary degree is increasingly critical, but student debt is preventing many would-be homebuyers from purchasing a starter home and reaching the “American Dream”.

Burdensome student loan debt and its stranglehold on our best and brightest are now having a spider web effect by affecting other sectors of our economic recovery. If we don’t demand mitigation, the effect student loans are going to have an effect on housing for years to come. The country will lose a significant amount of economic activity and hundreds of thousands of people will be unable to benefit from the stability and financial value that home ownership has been proven to offer.

When we finally began to notice the problem in American one Wall Street firm, BlackRock, Inc., had an idea that continues to be debated; it’s to forgive student loan debt for first time homebuyers. It’s still just an idea right and no serious talk has taken hold on exactly how the stimulus measure might work. Furthermore, it would take Congressional action because the federal government administers the majority of student debt and we all know they done have a clue how to deal with the problem effectively.

The move could be a creative way to ease student debt, which has quickly become a $1.7 trillion strangle hold on the American economy and the housing industry. Millennial workers with high levels of student indebtedness could have an outsize impact in supporting a housing boom and economic recovery post COVID.

Estimates are we have about seven million working Americans that would be eligible for an FHA-approved mortgage or the newly reintroduced 97 percent conventional programs for a USDA Zero Down Payment home loan, but because the cost to get an education has gone out of the roof the burden of student loans prevent them from qualifying for a mortgage. If just one million of them could convert to homebuyers through some form of student debt forgiveness, more than three million jobs could be created, recently reported on CNN Money.

If you think about it, the forgiveness becomes a productive debate and a real velocity to help Main Street this time around instead of the conventional approach to economic recovery by bailing out Wall Street. When people have jobs they start spending; they are taxpayers and essentially “self-fund” the idea. Such a proposal could get bipartisan support given that it would boost the housing sector, jobs and tax revenue. 

A much larger portion of personal debt for people aged 20 to 29 is devoted to student loans than in 2005. To look at it another way, stats from Bloomberg and Black Rock show that student loans now account for 36.8% of personal debt for people aged 20 to 29. It was only 12.9% in 2005. Mortgage debt, however, has fallen. It now makes up less than half of personal debt, down from nearly two-thirds in 2005.

Despite these points, academic economists are still debating the relationship between student debt and the real estate market. They argue that student loan debt has an extremely weak relationship to home affordability and suggest that first homebuyers are being dragged down by the sluggish recovery. Ask any loan officer on the front line taking applications and they’ll tell you different!

About a decade ago Beth Akers, a fellow in the Brookings Institution’s Brown Center on Education Policy, said that while it’s a “reasonable hypothesis” that student debt is preventing first-time home buys, it’s still not substantiated. She said the fraction of take-home pay that households are devoting to student loans was actually flat or even declining over the past two decades. What planet was she living on?

Akers further stated that, “forgiving student debt for first-time homebuyers probably would make a difference, just as writing checks to people, regardless of their student debt, would make a difference, but it isn’t necessarily good policy. I suppose the recent stimulus checks being sent out during the pandemic is blowing her mind. There are already some programs on the books for loan forgiveness, though most of them focus on aiding healthcare professionals or public service jobs. Previous White House Administrations have proposed to ease the student debt burden by extending the terms of the debt and lowering rates, but forgiveness would go a step further and an idea long overdue!