Student Debt, Lending Rules Stymie First-Time Buyers

Mortgage & Real Estate

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Education comes at a price, and not just the cost of the degree itself. We’re talking about the inability to take advantage of today’s low mortgage rates and stable prices.

Student loans are now cited most often by young buyers as the main expense that prevents them from saving for a down payment. Nothing new there, perhaps. But a new report from a well-recognized real estate consulting firm is the first to quantify the impact.

According to John Burns Real Estate Consulting, some 414,000 new home transactions will be lost this year because of student debt. At the average price of $200,000 per house, that translates to about $83 billion in lost business.

Burns analysts Rick Palacios Jr. and Ali Wolf say that in a typical year, about 8% of people aged 20-39 would normally buy a house. But many are weighed down by their student loans. Every $250 per month in student debt reduces young buyers’ purchasing power by $44,000, the 30-page report maintains. And of the 16 million people in the first-time buyer cohort, 5.9 million 35% pay more than $250 a month on their school loans.

Indeed, 5.9 million heads-of-household under the age of 40 now pay more than $250 a month in student loans, the Burns company study found. Large monthly payments like this can easily push would-be borrowers over the 43% debt-to-income ratio cutoff set by most lenders.

Here’s another way to look at the issue: Assuming a median first-time buyer income of $61,000 and a maximum mortgage for the typical first-timer, you’d be able to qualify for a loan of up to $234,000 as long as you carried no extra debt.

But if you have student loans and pay $250 on them per month, your maximum mortgage would be cut to $190,500. If your monthly school debt payment was $500, you’d be able to borrow only $147,000.

Since 2005, the amount of student loan debt has swelled, now exceeding $1.1 trillion, the report points out. That’s up from $241 billion in 2013. And the average balance has nearly doubled during that period, from $10,650 to $21,000.

Historically, better-educated, higher-earning consumers were more likely to become owners by the time they reached 30. But that trend reversed itself in 2012 and continues today. Now, it’s 30-year-olds with no history of student debt who are more likely to become owners.

Some 45% of all 25-year-olds have some student debt. But that’s not the only thing that’s holding them back.

Another report, this one from the National Association of Home Builders, says 83% of builders polled in August lost sales over the previous six months because their buyers could not qualify for financing.

Of course, contracts can fall through for any number of reasons. But well over half of the builders said lending standards were tight too tight for many first-timers to make the grade.

“If 83% of the builders lost 9.7% of their sales,” said NAHB economist Paul Emrath, “that works out to an estimated 18,700 new home sales lost because buyers were unable to qualify.”

Said NAHB Chairman Kevin Kelly, a builder from Wilmington, Delaware: “NAHB advocates for prudent lending standards, but we’ve seen banks and regulators swing the pendulum too far and create an environment where lending standards are too restrictive.”

Getting back to higher education. While we understand the value of a degree, the question, at least to the Citizens Financial Group of Providence, Rhode Island, is: Is it worth the price?

Certainly, college grads earn more than those who only completed high school perhaps twice as much over their working years. But a study by Citizens Financial found that many grads don’t believe going to college was worth the cost.

Indeed, more than three quarters wish they had planned better in paying down their student loans. And while nearly two-thirds of the former students agreed that “going to college enabled me to do great things in my life,” a whopping 47% said they may not have chosen college at all had they known the impact college debt would have on their lives.

“Despite the well-documented, long-term value of a college degree,” commented Citizens’ Brendan Coughlin, “too many Americans continue to struggle with paying the rapidly increasing cost after they have graduated.”

So builders wait, longing for the first-time market to return to some semblance of normal. But based on these three studies, they’re going to wait a long, long time.

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