Whether you are recently out of school, or have been out for a few years, the idea of buying your first home might be on your radar. But a growing number of millennials are putting off homeownership much later than their parents and grandparents did.
Even young couples are renting more, leaving economists and those in the housing industry racing to determine and address the issues holding back millennials and graduates from taking the plunge. Many renters point to one troubling roadblock in particular. Student loan debt, which often runs into the tens of thousands – if not hundreds of thousands – is increasingly causing graduates to hit the pause button on what used to be considered the normal life trajectory of college, marriage, and homeownership.
Student Debt and the Impact on Homeownership
For many people the idea of adding another monthly payment to a catalogue of monthly debt that often already includes credit card payments, a car payment, and a student loan payment, just doesn’t seem to make financial sense. Those on a standard 10-year student loan repayment plan typically are making monthly payments of several hundred dollars a month, assuming they graduated a four-year college with an average amount of debt. The looming question is often whether to put off buying a first home until they can get out from under the shadow of student loan debt, or at least pay it down to a size that feels more manageable. And increasingly, the answer for millennials is yes.
Perhaps that’s because the national level of student loan debt has reached a staggering almost $1.3 trillion dollars. That’s larger than any other category of household debt except mortgages. And while student loan debt can be found in virtually every demographic where the age is 18 or older, it is those currently in their 20s who carry the highest average balances. This is historically also the demographic who should be starting to buy homes for the first time, typically within just a few years of exiting college. They aren’t, and that’s a problem with repercussions that ripple out into the economy as a whole and beyond just that particular group.
It isn’t just buying a first home, either. Many millennials report postponing other life milestones due to worries about the student loan debt hanging over their heads. The average age for marriage is becoming progressively older as well. And while there are many factors that contribute to this trend – including significant unemployment rates and, importantly, women exercising their choice to start careers before families – increasingly this decision seems to also be influenced by a desire to pay down large portions of student loan debt prior to entering marriage. It appears that the student loan debt crisis has farther-reaching implications than once anticipated.
Coming back to the issue of homeownership, which not coincidentally is at a 50-year low, when student loan debt prevents the historical market of first time home buyers from purchasing homes it creates an unfortunate ripple effect throughout the housing market. It’s also got everyone from economists to mortgage brokers worried, for a variety of reasons.
First, lower numbers of people buying homes overall means that jobs that depend on home buying are in trouble. Loan officers, mortgage companies, realtors and real estate agents, even home inspectors, see a decline in income and revenue when such a significant portion of the population defers the choice to buy and decides to rent. The broader real estate market depends upon the constant influx of new owners. Less people buying means that the market experiences shrinkage, as do the jobs that depend on it.
Second, there are negative consequences for established homeowners as well. It’s common for those just entering the market to purchase what’s referred to as “starter homes,” generally lower in value, and then to upgrade to a nicer or larger home when careers take off and incomes become greater. But in order to upgrade a home, the starter home must be sold to someone else. Typically, that “someone else” is someone who is themselves just entering the market and looking for an affordable starter home. When there are less people willing to enter the market, there will be weaker demand at the starter home level, and those wishing to trade up their existing home will be looking at either a longer wait to sell or a forced slash in price – sometimes both. This causes stress in that established level of homeowners.
There are several ways that carrying a large student loan debt hinders homeownership. As already mentioned, there is a psychological factor at play when thinking of adding a mortgage payment to a monthly balance sheet that might already float several credit cards, a car payment, and a student loan payment. Also, the additional strain on available income might be too much.
Renting, although typically more expensive in the long run, is predictable. Your rent remains steady every month with no surprises, and if the air conditioning goes out or an appliance stops working, it isn’t the tenant who foots the bill for the fix. However, owning a home puts a variety of strains on income, some of which are regular and predictable, much like rent, but others which are unpredictable and thus hard to plan for. Monthly mortgage payments are only the tip of the iceberg when it comes to the costs of owning a home.
Other monthly costs can include private mortgage insurance, hazard insurance, and property taxes. More than that, sudden costs such as necessary repairs, appliance replacements, and insurance deductibles can easily add up to hundreds or thousands of dollars in just one month. The benefits to homeownership are many, but so are the costs, and they are much more unpredictable than signing a rental contract. It may be that this seems like too much of a financial risk to those already saddled with large monthly debt payments.
Some potential homeowners might wish to purchase but be unable to find a mortgage lender willing to overlook the high debt-to-come ratio that typically comes with carrying a large student loan balance. Typically, lenders will look at all existing monthly payment obligations and then add in an estimated monthly mortgage payment to determine whether all monthly minimum payments when added together come to 43 percent or less of your monthly income. It’s easy to exceed that ratio, especially for potential borrowers in metro areas where home prices, and corresponding mortgage payments, are highest.
Not to mention, making those pre-mortgage monthly debt payments makes it hard to save up the recommended 20 percent down payment for a home. For most buyers who don’t have 20 percent to put down against the sales price, the lender will require that they make a monthly private mortgage insurance payment in addition to other mortgage- and home-related expenses. This further drags down the debt-to-income ratio, and no doubt plays its part in many decisions to continue renting in lieu of buying.
Unfortunately, identifying the underlying issues have proven to be easier than identifying potential solutions. The burden on student loan borrowers has reached an unprecedented level, impacting the economy in a myriad of ways. To counter its consequences requires coming up with solutions to ease both the monthly payment issues plaguing graduates and also the problem of high, sometimes unsustainable, loan balances. Proposed solutions include legislative reform, employment-sponsored loan payback, and increased lender concessions for borrowers. Once thing is clear – the problem isn’t going to go away on its own, and likely will get worse before it gets better.
Author: Jeff Gitlen
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