The combination of tough new rules denying qualified mortgages to applicants without the ability to repay and soaring study loan debt may be doing more than anything else to shut an entire generation out of homeownership.
First-time buyer market share has fallen to 27 percent in recent months. Rising prices, thin inventories of starter homes, rising down payment requirements and tight lending standards have made it hard on first-timers trying to climb the first rung of the homeownership ladder.
A news analysis by an economist at the National Association of Realtors suggests that student debt, which is now the second largest component of household debt next to mortgage debt, may have a depressing effect on home sales for years to come due a provision in the new QM rule, which took effect last month. The QM rule requires a consumer to have a debt to income ratio of no more than 43 percent including mortgage payments, will not make buying a home an easier for debt-straddled college graduates.
“The commitment to pay student debt may mean a pushing back of the timetable to purchase a home to build up savings or purchases of more affordable home. A $25,000 student debt reduces the potential homebuyer’s borrowing ability by about the same amount2. For the millennials, the home purchase may be pushed back by about seven years,” wrote research economist Scholastica (Gay) Cororaton last week.
As of the third quarter of 2013, student debt stood at $ 1.027 trillion or about 9 percent of total household debt, up from about 3 percent in 2003. It is now the second largest component of household debt next to mortgage debt. A $25,000 student debt translates to a monthly payment of about $285 at 6.6 percent interest payable over 10 years. The present value of these payments at mortgage rate of 4.1% in 2012 is $28,031. At 90% LTV, the amount borrowed is $25,228.72, she said.
Student loans are one of the fastest rising source of debt. As of the third quarter of 2013, student debt stood at $ 1.027 trillion or about 9 percent of total household debt, up from about 3 percent in 2003. The average college graduate obtained a degree in 2012 with $29,400 in student debt, up from $18,750 less than a decade before in 2004, according to a report released in December by the Project on Student Debt is an initiative of The Institute for College Access & Success (TICAS).
Ms. Cororaton is only the latest of a number of real estate experts to raise alarms about student loans. Last year, consultant John Burns concluded the student loan generation would benefit rentals, not home sales.
“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,” Burns wrote.
In an October 2013 speech, the student loan ombudsman for the Consumer Financial Protection Bureau said nothing is hurting the housing recovery in such a nuanced way as student loan debt.