Three years into the national housing recovery, mortgage rates remain at still-low levels (yes, 4.5 percent is low!) and the cost of ownership is cheaper than renting in most areas, so why aren’t younger people jumping at the chance to own their piece of the American Dream? The answer may surprise you. In the most recent Existing Home Sales report, the National Association of Realtors said that student loan debt is hurting home sales.“20 percent of buyers under the age of 33, the prime group of first-time buyers, delayed their purchase because of outstanding debt. In our recent consumer survey, 56 percent of younger buyers who took longer to save for a down payment identified student debt as the biggest obstacle.”
Total outstanding student debt is nearing $1.2 trillion or a median of $27,000 per student in 2012. The numbers are even worse for graduate students whose debt levels soared an inflation-adjusted 43 percent between 2004 and 2012, with a median debt level of an eye-popping $57,600, according to the New America Foundation. The government says that the recent surge in student loans appears to come from for-profit colleges, which account for 13 percent of students in higher education but nearly a third of all student loans and half of all defaults. As a result the Education Department recently announced a plan to deny federal loans to students at institutions for which the default rates exceed 30 percent.
While the student loan crisis is garnering attention, it doesn’t help the people who graduate with the bulging debts. It’s easy to understand how the burden of a fat loan payment might make a home purchase out of reach for many. Even if the young debtors have jobs that allow them to keep current with their obligations, it’s still difficult to qualify for a home mortgage. According to the WSJ, “The average FICO score for a conventional mortgage – one that’s sold to mortgage giantsFannie Mae and Freddie Mac— was 755 in February, according to Ellie Mae’s latest mortgage origination report.”
The combination of high debt burdens, combined with the difficulty in qualifying for a loan has resulted in homeownership levels dropping to just 36.8 percent for the under 35 group, down from 42 percent in 2007. Yes, the recession took a bite out of total homeownership, but there is no doubt that the rising tide of student loan indebtedness (Econbrowser notes that the dollar value of outstanding student loans has surged, growing from 4 percent of GDP in 2007 to over 7 percent today) is playing a role in the housing numbers.
How did we get to this place? Education inflation has increased at about twice the pace of overall inflation and at the same time, a college degree has become more valuable.Pew Research Center found that Millennials with a college degree earn more than those who stopped their formal educations during or after high school. Between 1965 and 2013, median annual earnings, among college-educated full-time workers aged 25-32 rose to $45,500. Meanwhile, their high-school-educated peers lost more than $3,000, with earnings falling to $28,000 over that time period. In other words, a college degree is worth more and a high school degree alone is worth a lot less. Additionally, college grads earn more over their lifetimes. A college degree offers a 30-year wage premium of over $200,000 in extra income compared to a high school graduate’s salary, according toPriceonomics blog.
College may be worth it, but going into debt up to your eyeballs to earn that coveted degree may not be. Not only might it rob you of the ability to buy a home, it could also force you into taking the highest paying job, instead of the one that might put you on the best career path for you.
Image by Flickr User Herkie