The Sobering Link Between Student Debt and Housing

The housing market has been steadily improving, lifting the stocks of homebuilders like Beazer Homes (NYSE: BZH  ) , Hovnanian (NYSE: HOV  ) , and PulteGroup (NYSE: PHM  ) to heights not seen since the mortgage crisis. Indeed, a recent Federal Reserve survey noted that housing helped buoy the economy during the first two months of this year, along with auto sales.

But housing isn't out of the woods yet. While the most recent Census Bureau data shows that housing starts were up considerably, building permits were down from February, putting the brakes on many homebuilders' upward stock price trajectory.

Why is housing still so lethargic? A new study by the Federal Reserve Bank of New York has found one disquieting reason: A new generation, saddled with student loan debt, is increasingly unable to take the plunge into home ownership.

A 10-year low
Despite gains in the housing sector, some analysts note that an important ingredient for a long-term recovery is missing -- the first-time home buyer . According to David Stockman, former head of the Office of Management and Budget during the Reagan era, a perfect storm of crippling student debt and high unemployment is keeping a key population sector from purchasing their first home.

Apparently, he is right. The FRBNY study shows that, for the first time in 10 years, 30-year olds without student debt are exhibiting higher rates of home ownership than those with student loans to repay. This is huge, for, as the paper points out, those with college loans have higher levels of education, which generally translates into higher incomes. A large contingent of entry-level home buyers, burdened with $1 trillion of student debt, has effectively been shut out of the housing market.

Plunging home values began a vicious cycle
This fact hasn't gone unnoticed by homebuilders. The National Association of Home Builders recently submitted comments to the Consumer Financial Protection Bureau outlining how onerous student debt is impacting its members.

The letter notes that not only have levels of home ownership fallen for those under the age of 35, but for prospective home buyers aged 35-44, as well. The biggest factor NAHB saw contributing to the explosion of student loan debt? Plummeting home values, which diverted resources away from assisting children with college costs, and prevented tapping the family home's equity to finance higher education.

Now, the problem has come full circle, with the loan-laden graduates now unable to buy their own homes. I imagine that this issue also has implications for home-improvement retailers such as Home Depot (NYSE: HD  ) and Lowes (NYSE: LOW  ) , both of which will miss out on the initial spending trips made by new-home buyers, as well as the eventual maintenance and remodeling market that would evolve over time.

Can housing truly recover without this population of buyers? It doesn't seem likely, particularly since a dearth of one key element for a housing recovery, first-time buyers, precludes the formation of the second -- buyers that are trading up. Nor does it seem possible that, with an average debt load of more than $20,000, many of these young people will be able to swing a mortgage any time soon. It seems clear that, until the student debt crisis is addressed, the housing recovery will continue to miss the mark.

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  • Report this Comment On April 20, 2013, at 11:18 PM, zukerman wrote:

    This has to be an article that was meant for 4/01/13 press wire. Your telling me that as an financial institution there is no new found wealth from the return of these markets? It shouldn't take very long for mom and dad to tire of junior living in the basement before they a) pay of his school debt or b) loan him the cash for the down payment. Those that flip houses have kept the banks busy lately, but once this segment dries up look for the banks finding a way to keep their bottom lines intact. This is all just part of the process where the banks hoard their cash to see who blinks first. Once home values return to reasonable levels the banks will loosen their standards for lending. The rental market will saturate in about a year and banks will have no choice if they want their profits to improve with the economy.

  • Report this Comment On April 21, 2013, at 10:14 AM, TMFBreakerRob wrote:

    Good article, Amanda!

    Each household has a maximum capability for debt service. If a substantial amount of that capacity is absorbed by student loan payments, that reduces the amount available for a mortgage.... or, for that matter, rent.

    I've seen some young people who are much more burdened from this debt situation than would first appear. Many have incurred substantial debt in the pursuit of degrees.... that don't lead to marketable skills, or where there is very limited demand. As a consequence, they are truly stuck. Lots of debt and little capability to do more than pay for it... if that.

    Tough situation.... but largely a "self inflicted wound".

  • Report this Comment On April 21, 2013, at 11:59 AM, keepanopenmind wrote:

    Good article.

    I have worked in Higher education for 10 years. I've seen tuition increasing, because of repetitive state cutbacks in education funding. This is an additional impact that forces parents and students to borrow more money for school. We need to make education a national priority again.

  • Report this Comment On April 21, 2013, at 1:19 PM, SGLear wrote:

    A lot of good points in this article. As a 26 year old with a Bachelor's and 141K in student loan debt, I can tell you that, at this point, it's impossible for me to buy a home. Even though my student debt is considered "good debt", it nevertheless skyrockets my debt-to-income ratio to such a high degree that I can't get a mortgage anywhere.

    And to zuckerman: try to see the realities of a situation before making patronizing comments. Calling us "junior" is demeaning, disrespectful and not-at-all reflective of the hard-working people in this country possessing outrageous student loan debt. And the parents of these 20-35 year olds can't pay off their childrens' debt or make a down-payment on a house, because the parents have no money themselves (especially if they're approaching retirement.)

    The lending industry will reap what they've sown in years to come, when no one can get a house, start a family or invest because their student debt cripples their earnings potential and purchasing power.

  • Report this Comment On May 06, 2013, at 3:06 PM, PseudoPneuma wrote:

    Zuckerman seems to have little or no understanding of the current situation. Many of the people burdened by student debt did so primarily because their parents couldn't, not wouldn't help. And the VAST majority don't live at home, they live in the rental market.

    For years parents were telling their kids, "If you don't want to be flipping burgers you need to get a degree" Now when those newly degreed grads look back to their parents saying, "This degree has cost me much of my future in debt, but I'm flipping burgers anyways and can barely make my payments" all those parents can really say is, "Tough luck, kiddo"

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