Rising Student Debt Exhibits Strong Correlation to a Slowing Housing Market

imgresStudent loan debt has skyrocketed from about $200 billion to $1.1 trillion in the past decade.  On Friday, September 19th 2014, Real Estate Consulting, an advisory firm, released a report entitled, “Student Loans Will Cost the Industry $83 Billion This Year” detailing the impact of student loans on home buying.  The report arrived at the conclusion that “8% fewer homes will transact than normal in 2014, purely due to student debt…Our conclusion is that 414,000 transactions will be lost in 2014…At a typical price of $200,000, that is $83 billion per year lost in volume”.  The research primarily focused on persons under the age of 40 years old with student loan debt.

The study found that student loan debt puts households at a setback to achieve homeownership, if they end up owning a home at all.

“Of the 16.8 million households [representing student debt holders under age 40], 5.9 million (or 35%) pay more than $250 per month in student loans, which inhibits at least $44,000 per year in mortgage capability for each of them…Every $250 per month in student debt reduces a household’s home purchasing power by $44,000…The percentage of households under 40 with student debt paying $250+ monthly is up from 22% in 2005 to 35% currently, acting as an added headwind for millions of potential homebuyers… Most households paying $750+ per month in student loans are priced out of the market.  Only those in the highest-earning brackets can afford to purchase” ( Real Estate Consulting, 2014).

The Wall Street Journal made a graph to paint the picture of how much Americans are paying to student debt and how this has increased over the past 9 years.  See the figure below:


The graph shows a significant increase both in the proportion of households under 40 years old with student debt, and also the amount of debt assumed over the years.  Student debt has accumulated at an alarming rate, with special thanks to the substantial rise in college tuition over the past decade.  Taking in to account the idea that for every $250 in student loan debt each household loses approximately $44,000 in affordable home value, this figure is especially alarming to the housing industry.  Not to mention the fact that lenders typically require their borrowers to have a debt-to-income ratio not to exceed 43-45% of their gross annual income.

The Real Estate Consulting report concludes that home sales should incur 414,000 “lost” home sales as a result of rising student debt.  The most substantial loss occurs in the households with student debt ranging from $100 to $500.  See the figure below:


The study shows that the outstanding debt will force those in the market for a home to by a less expensive home in order to save for a down payment.  The Wall Street Journal states, “The typical first-time buyer can qualify for a $234,080 mortgage without any student debt, but that figure falls as the monthly debt burden rises.  (The analysis assumes that the traditional first-time buyer has income of $61,000.)”.  This means that with student debt, the buyer has to have an income that exceeds $61,000 in order to get the same deal as a first time buyer without that debt.  WSJ goes on to state, “The analysis assumes that most borrowers with $750 or more in monthly student debt payments will be priced out of the market unless they are making much more money that the traditional first-time buyer.  For the typical entry-level buyer with $750 in monthly student debt payments, they can qualify for a $103,280 mortgage”.  The home that the first-time buyer with $750 in monthly student loan payments is over $100,000 less than that of the first-time homebuyer without any student debt at all.  With those statistics alone, it seems as those with student debt will most likely stick to renting.

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