Demographics

Skyrocketing Student Loan Debt Will Delay Homeownership

Rick Palacios Jr photo

Rick Palacios Jr

December 9, 2012

Student loan debt now totals $865 billion, which is greater than all credit card debt outstanding, as well as all other types of household debt except for mortgages! College graduates have debt averaging $25,000. Even more troubling is the rise in debts associated with for-profit college and trade schools, whose revenues come primarily from debt available through Federal government programs. The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled. With the economy little improved since 2009 (two-year lag on data), default rates are bound to rise further.

Student loans are going to be yet another hurdle for the housing market to overcome. Faced with mounting student loan debt, poor job prospects and stagnant wages, an increasing amount of 25 to 34 year olds (a prized demographic for the housing sector) have moved back in with their parents. Almost 6 million 25 to 34 year olds now live with mom and dad, up 26% from when the recession started in 2007. Today’s 36.8% homeownership rate for 25 to 29 year olds is at its lowest level since 1999, and homeownership for 30 to 34 year olds is at its lowest rate in 17 years.

The good news is that this pent-up demand will ultimately provide a much needed boost to the housing sector. The bad news is that the boost will be heavily skewed to the rental market as it will take longer than ever for young people to qualify for a mortgage, especially if more and more graduates are hit with credit blemishes from unpaid student debt.

To help struggling graduates, the Obama Administration recently announced a program to help those with student debt reduce their payments down to 10% of their income. However, with student loans at 10% of income, how will these people be able to qualify for a home?

All of this analysis contributes to our belief that the lion’s share of housing demand will end up in the rental market. Look at the tremendous growth we expect in rentals in comparison to the last decade.

U.S. Housing Market Statistics

Economic Growth………………………………………………………………….C-

The U.S. economy continues to steadily improve, albeit at a rate far below past recoveries. Notably, 3Q11 GDP growth is at 2.0%, the job picture is slowly improving, and businesses are beginning to expand capacity.

Leading Indicators…………………………………………………………………C-

Global economic uncertainty hit the stock market in November, with almost all major indices witnessing sequential losses in November. Were it not for the end of month rally (largest daily advance since March 2009), the losses would have been much worse.

Affordability…………………………………………………………………………..C+

Ridiculously low mortgage rates coupled with growth in median household incomes (still low by historical standards) helped push our JBREC Affordability Index to an A+ grade this month. Negative equity, however, continues to weight on this subset of indicators, leading to an overall affordability grade of C+.

Consumer Behavior………………………………………………………………..D+

Two of the three major consumer psyche gauges improved in November, helping our overall consumer behavior grade improve from a D to D+ this month. In addition, most consumer credit default indices improved, as did personal savings.

Existing Home Market……………………………………………………………..D

Aside from NAR October resale prices, all of our existing home market indicators improved this month, though still not enough to boost this subsection of the economy’s grading from a D.

New Home Market……………………………………………………………………C-

The overwhelming majority of new home indicators improved this month, helping boost our overall grade for this subsection of the economy from a D+ to C-.

Repairs and Remodeling…………………………………………………………..C-

Only two of the eight residential repairs and remodeling indicators we track reported new data this month (BuildFax Residential Remodeling Index and private residential construction), both of which turned in positive results. Nevertheless, our overall grade for this subsection of the economy remains unchanged at a C-.

Housing Supply………………………………………………………………………..F

Single-family starts and permits rose from last month, though not enough to improve our overall housing supply indicator grade of F. The multifamily space continues to ramp up supply in an attempt to capitalize on demand for rentals.

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About The Author

Rick Palacios Jr photo
Rick Palacios Jr
Managing Principal, Director of Research
Rick oversees and guides JBREC’s research platform while coaching his team daily.

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