How student loan debt is causing a chain reaction in the housing market

“There are roughly 54 million millennials in the workforce in America, and about 70 percent of them have student loan debt, which is incredible,” said John Zurick, president and CEO of Help for American students, a Boston-based nonprofit organization. “That’s a lot of people.”

It is also a lot of money. The average student loan balance is well in the five digits – and enough to tempt some millennials to postpone life milestones. In a ASA 2015 survey among borrowers, 1 in 5 said they postponed their marriage due to student debt, while more than half said loans delayed their decision to buy a home.

With the homeownership rate in the United States at its lowest in 50 years, it is this latest finding that worries economists and real estate agents. A joint report by the National Association of Realtors and the ASA found that 71% of student loan borrowers who did not own a home cited their college loans as the main prohibitive factor, and more than half said they did. ‘expect their student debt to delay the purchase of their home for five years or more. The record house prices here certainly don’t help either.

Student debt and the market aren’t the only reasons Millennials have pushed back homeownership; they tend to marry and have children later in life than previous generations, for example, and they have experienced higher unemployment rates and slower wage growth. “All of this delays the entry point to homeownership,” said Lawrence Yun, chief economist at NAR.

Before continuing: I understand if you already have millennial fatigue. As Gen Xer, I certainly do. But there are good reasons to be concerned about the low rate of homeownership among young Americans. “First-time buyers are causing a chain reaction” in the housing market, Yun said, creating activity throughout the economy, from leasing trucks to buying household appliances.

“This demand is critical to the health of the housing market as a whole,” said Jonathan Spader, senior research associate at Harvard’s Joint Center for Housing Studies. People are more likely to form families and enter the housing market for the first time in their 20s or 30s. And when young adults buy their first home – often a low-cost entry – it allows an established household to sell. “Since demand is low among first-time buyers, this is preventing existing homeowners from trading,” said Spader.

Student loan debt creates barriers to homeownership in a number of ways. “The first is the income brake,” Spader said. “Paying off a student loan each month reduces the amount of income you can save for a down payment. Indeed, 4 in 5 non-millennial homeowners in the NAR / ASA survey said student loans affected their ability to save a down payment.

Meanwhile, even if you are able to lower your monthly student loan bill through one of the federal government’s income-based repayment plans, it might not help your debt-to-income ratio when you apply for a loan. mortgage. “The problem is, most lenders don’t recognize these payment amounts,” said Betsy Mayotte, director of consumer awareness and compliance at ASA. “These amounts can change from year to year if your income goes up,” she said, and lenders don’t like that uncertainty.

Unfortunately for millennials overwhelmed with loans, delaying the purchase of a home in recent years can have come at a cost. “We have low first-time homebuyer participation at a time when home values ​​are rising, which means homeowners get real estate wealth, but people who don’t own are left out,” Yun said. . Take the example of a graduate in her mid-twenties who felt too burdened with student debt in 2011 to buy a $ 300,000 house and decided to wait until she paid off her loans. Over the next five years, Greater Boston home values ​​rose 23.4%, according to the Case-Shiller Home Price Index. This same house would now cost him about $ 370,000.

While many experts agree that a college education is always worth the sky-high price – degree holders on average earn higher salaries and are more likely to own a home in the long run – there are trends. disturbing buried under this trillion dollar school loan. pile of debts.

The first is that more and more students are borrowing thousands of dollars for college but not completing their studies. “The people who have the most difficulty are those who are in debt, without a degree and without a job,” said Zurick. “Without a degree, it is much more difficult to get a job that will support your debt.” This punch particularly affects minorities and low-income students, because Boston Globe Magazine reported in May.

As you can imagine, borrowers with debt but without a degree find it even more difficult to buy a home. While college graduates are 27% more likely to own a home than those with only a high school diploma, according to a study by mortgage agency Fannie Mae, a person with no college debt was actually 37% less likely to buy a home than that same high school graduate with no student debt.

The second big problem on the horizon is that 11.1% of student loans are 90 days or more past due, more than any other type of consumer debt. “The impact of these defaults on their credit reports could be a barrier to homeownership in the future,” Spader said.

“A default is a really big deal – it’s the equivalent of bankruptcy or a lien on your credit report,” Mayotte said. “Fortunately, one thing that federal loans offer that no other debt does is repayment, a repossession. If you make nine consecutive payments on time….” The defaults that led to the default remain, and those – These remain on the credit report for seven years. But the real flaw, the big blow, goes away. “

Asked what college applicants should consider when comparing schools and financial aid offers, Mayotte said it’s critical to understand what your monthly loan bill will be after graduation. “Students and consumers see a number of $ 40,000 or $ 100,000, and that number is difficult to understand,” she said. “We recommend that you think about it in terms of monthly payment. . . Maybe $ 100,000 in total seems manageable, but is $ 1,000 a month, every month, really going to be right for you? “

Possible remedies for the student loan crisis exist, both during the presidential campaign and in the real world. Some schools offer repayment guarantees, and more and more employers are including loan repayment as a standard benefit in recruiting and retaining the brightest workers. But there is no quick fix.

“The problem isn’t just going to go away,” said Zurick – and whether we like it or not, it affects us all. Student loans are a burden not only on borrowers, he said, but also on their families, employers and even taxpayers, who must pay if they default.

“When people can’t find jobs and don’t have the resources to pursue dreams of a sustainable life in America, then they come to this situation where the gap between the haves and have-nots widens,” he added. “It affects our whole culture and our economy.”

Jon Gorey is a freelance writer at Quincy. Send your comments to [email protected]. Follow him on Twitter at @jongorey.