A race against time: Student loan debt stalls first-time homebuyers
The American culture has undergone a seismic shift with today’s thirty-year-old less likely to take out a mortgage if they already hold student loan debt.
A new study from the Federal Reserve Bank of New York evaluated the student loan debt situation and found for the first time in a decade, thirty-year-olds with no history of student loans are more likely to have a mortgage than those still paying off education loans.
This is a significant trend considering ten years ago students with some debt were more likely to take out mortgages due to higher levels of employment and income overall.
"However, this relationship changed dramatically during the recession. Homeownership rates fell across the board: thirty-year-olds with no history of student debt saw their homeownership rates decline by 5 percentage points. At the same time, homeownership rates among thirty-year-olds with a history of student debt fell by more than 10 percentage points," the FRBNY posted in a blog on the situation.
"By 2012, the homeownership rate for student debtors was almost 2 percentage points lower than that of nonstudent debtors," the NY Fed researchers said.
This means for the first time in ten years, thirty-year-olds with no history of student loans are more likely to have home-secured debt than their contemporaries who funded their educations with debt.
Student loans have shot up in popularity, with the aggregate student loan balance reaching $966 billion – just under a trillion – in 2012.
The delay in taking on mortgages is statistically linked to more students taking on education debt and at higher levels.
The Fed’s study shows the share of 25-year-olds with student debt increased from 25% in 2003 to 43% in 2012. The average student loan balance among that group also rose by 91% from $10,649 in 2003 to $20,326 in 2012.
Why this spells bad news for the housing market is simple: while students are paying more for school – and were apparently willing to do so in the recession – they still participated in the massive deleveraging process that occurred after the recession.
However, they are deleveraging by avoiding auto debt and home mortgage debt, stalling other portions of the economy.
On net, per capita debt for those with student loans declined by $5,687 during the four-year deleveraging period from 2008 to 2012. This is line with the mass deleveraging among all U.S. consumers that occurred during this period. In fact, those with no school loans saw their per capita consumer debt also decline by $7,095 in four years.
This shows student borrowers delevaraged and cut back even after their average debt levels reached a peak of $35,559 in 2008, but they have been cutting back on debt like the rest of America. The problem for home sellers is they are doing so by avoiding auto and home loans altogether.
Tightening credit standards is another issue, the NY Fed blog said.
"In response to the recent recession and credit crunch, lenders have tightened underwriting standards in all major consumer debt markets. Consumers with substantial student debt may not be able to meet the stricter debt to income (DTI) ratio standards that are now being applied by lenders," the blog reported.
Late payments or student loan defaults also make potential homebuyers vulnerable, hurting their credit scores early on and making it more unlikely for them to obtain mortgages later on.