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The Sobering Link Between Student Debt and Housing

By Amanda Alix - Apr 19, 2013 at 12:12PM

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Student loan debt is keeping many out of the housing market.

The housing market has been steadily improving, lifting the stocks of homebuilders like Beazer Homes (BZH 2.59%), Hovnanian (HOV 3.56%), and PulteGroup (PHM 2.69%) 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 (HD 0.74%) and Lowes (LOW 1.39%), 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.

Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Lowe's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
HD
$311.97 (0.74%) $2.28
Hovnanian Enterprises, Inc. Stock Quote
Hovnanian Enterprises, Inc.
HOV
$48.30 (3.56%) $1.66
PulteGroup, Inc. Stock Quote
PulteGroup, Inc.
PHM
$43.52 (2.69%) $1.14
Beazer Homes USA, Inc. Stock Quote
Beazer Homes USA, Inc.
BZH
$15.44 (2.59%) $0.39
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
LOW
$201.84 (1.39%) $2.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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