Student debts do more than just limit the amount of money young adults are able to spend on things like entertainment and travel. With tight budgets, those who have just entered and established themselves in the marketplace are often choosing to rent, rather than buy a new home. As a result, “The growing student loan burden carried by millions of Americans threatens to undermine the housing recovery’s momentum by discouraging, or even blocking, a generation of potential buyers from purchasing their first homes,” posits Dina ElBoghdady.
Much of the recent growth of the housing market was spurred on by investors who bought homes at lower rates. Now, however, climbing home prices and increased mortgage rates are slowing that trend, so first-time buyers are more hesitant. In fact, research by the Mortgage Bankers Association has found that, compared to the same period a year ago, loan applications for home purchases have fallen almost 20% over the last four months.
Lawrence Yun, chief economist at the National Association of Realtors, has found that, in the last half year, fewer than 30% of all home sales went to first-time buyers. “And this is historic lows,” he says. “Typically it should be about 40% to 45%. And I believe the key reasoning is that many of the younger households, they are saddled with student debt.”
Last year, U.S. student loan debt rose to nearly $1.1 trillion, but wages have not necessarily increased. As a result, it is nearly impossible for many recent grads who should be first-time home buyers right now to afford a down payment or invest in a mortgage.
Rohit Chopra, student loan ombudsman for the Consumer Financial Protection Bureau notes that wages are not rising fast enough relative to loan burdens. “Real wages when adjusted for inflation have actually been flat for new college graduates for about the past ten years. So young people have more debt but are earning the same or less income,” he says.
A recent survey conducted by the National Association of Realtors found that, of the 20% of first-time buyers who reported having trouble saving for a down payment, 54% cited student loans as a factor. Roughly half of respondents said that student debt was a “huge” hindrance to purchasing a home.
Stephanie McCloskey, a 26 year old administrative assistant who lives in Maryland felt good about being able to buy a house. Two years out of school, she was hopeful that she would be able to get a mortgage for a home in Gaithersburg, Rockville, or even Frederick. However, a lender said the $500 a month she spends paying back loans took up too much of her income.
“I didn’t know anything about buying a house when I was taking out a student loan, so it’s almost like I am being blindsided by a decision I had to make years ago,” she said.
McCloskey is certainly not alone in feeling blitzed by the burden of student loans, and potential home buyers across the country are struggling to find the means to afford both a mortgage and loan payments, which could have a drastic impact on the health of the housing industry.
“It’s important to look at the effect the increased interest rate will have,” says Nobel Davis, expert real estate professional at Santa Fe Exclusives. “Going from 4.28% to 4.33% will increase a monthly principal and interest payment on $100,000 by a few dollars. The lesson here is if you’re in a position to purchase a home, don’t wait. These are still historically low interest rates and you have the opportunity to get more home for your money without putting yourself in a “house poor” situation.”