Credit To Selma Hepp, Ph.D.,
At May’s midyear legislative meetings held by the National Association of Realtors in Washington, DC, a panel of experts in a session titled “Shifting Demographics and Housing Choice: A Whole New World?” discussed future housing market demand and trends to keep in mind as we think about the future of housing in the U.S.
The biggest takeaway was that baby boomers will increasingly contribute to housing supply as they age, yet echo boomers are in a difficult position to absorb the inventory. The echo boomers, also called Millennials, are those currently ages 17 to 31, and account for 62 million people. And although future housing demand highly dependents on different rates of household formation among Echo Boomers, this generation is in a precarious position.
In addition to having seen the worst housing downturn, these younger buyers have been hit hard by the recession. Faced with an uncertain job market, no real income growth, tighter mortgage lending rules, and mounting student and credit card debt, it is no surprise that some of them do not put priority on homeownership.
The concern over student debt is particularly alarming. According to a number of recent research studies, college seniors who graduated with student loans each owed an average of $25,250, up significantly from an average of $12,750 in 1996. Parents have accumulated student debt as well, $34,000 on average. The aggregate amount of student loan debt in the U.S. is over $1 trillion currently. The pace at which debt is mounting adds to the concern. Between March 31, of this year and 2011, student loan debt rose by $64 billion. However, over the same period, all other forms of household debt fell by $383 billion. Put another way, since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell by $1.53 trillion.
The rise in student debt is attributable to rising cost of education. Since 1978, the cost of tuition in the U.S. has increased more than 900 percent, 650 points above inflation. Between1990 and 2010 alone, tuition rose by 116 percent while the median household incomes inched a mere 2.1 percent.
There are some variations across states though. California ranks 46th among the 51 states – with average student debt at $18,113. New Hampshire ranks 1st with highest average debt at $31,048. Also, in California, about 48 percent of 2010 graduating class had student debt, while in New Hampshire 3 out of 4 students had student loans. But even within California, student debt ranges widely, particularly between public and private institutions. While debts from public colleges reaches $24,000, some private college students have walked out with over $50,000 in student debt . Figure 1 depicts the change in total cost of attendance and average debt of graduates for the last decade for California institutions for 4-year or above college education. One startling point to note is that total cost of attendance has been growing faster than average student debt of graduates. One reason for that may be that parents are picking up more of the costs.
So, how does the increasing student debt play into home buying process? Student loan payments are included in Debt-to-Income ratio. The ideal 33 percent of debt-to-income includes student loan payment, car payment, credit card payments and the monthly mortgage payment. Table 1 below provides a simple estimate of the impact of student loan debt on one’s ability to afford a mortgage payment. With recent discussion around doubling of current student loan interest rates from 3.4 to 6.8 percent on July 1, there are two scenarios included. The first one looks at the impact of an average $19,000 loan facing recent California graduates and the second scenarios illustrates the impact of higher student loan debt, $50,000. In both cases, student loan payment increases with doubling of interest. While the average student debt impacts mortgage payment by 2 percent, the larger debt has a 7 percent impact on the mortgage payment. In either case, student loan payments matter in evaluating debt-to-income ratio for potential new homebuyer.
Given the already very large federal deficit an additional government spending in form of interest rate subsidy to students must be viewed cautiously. Such issues as college administration staff and salaries, which may be raising overall tuition must also be examined. Still, it is worth analyzing the growing student debt load and its potential impact to future home buying.