A recent headline from the Washington Post highlights the problem of how growing student debt may be hampering an economic recovery.
Student debt may hurt housing recovery by hampering first-time buyers
The share of 25-year olds who have student loans is now at almost 50%, with an average loan balance of over $20,000. Instead of saving money for a down payment to buy a house, many of these young people must prioritize paying down their student loans.
The money going into paying down student loans is not going into saving for a down payment.
First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped.
The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.
Recent changes place greater restrictions on the debt-to-income ratio allowed for mortgages.
Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses.
Most who struggled to buy their first home blame student loans.
Of the 20 percent of first-time buyers who said it was difficult to save for a down payment, 54 percent said student loans made it tough to save money, according to a recent survey by the National Association of Realtors. About half of the people polled in another of the group’s surveys said student debt was a “huge” obstacle to buying a home.
On the other hand, my anecdotal information tells me that a reluctance to be tied down to one location may also be an important factor in why young people are reluctant to buy homes.
Related: Amid declining household debt, rising student loans remain a drag on the economy (Cost of College)