Student Debt and Home Buying

David Dayen has a piece about the effect of student debt on the household formation of "millenials." I put the word in quotes because most millenials are not the college-degreed individuals pieces like this fixate on. Nonetheless, it is the case that younger people are less likely to have mortgages at age 30 than they were prior to the recession. Whether this is a function of student debt is much less clear. Here I detail that theory and two others.

1. Secular Preference Shifts

Weissman and Thompson argue that the decline and delay in buying homes and cars is, at least in part, driven by cultural changes. Young people are less interested in driving and owning homes than they used to be. They prefer to be in denser, more urban areas and are willing to rent longer to do so.

One problem with this theory is that although home and car purchases have fallen across the board among young people, it has fallen somewhat more among young people with student debt. Some suggest this data shows that, whatever preference shifts are going on, student debt must be a contributing factor as well.

This is a fair point that is consistent with the data, but it is not a point demanded by the data. The drop offs in mortgages happen during the Great Recession, and it is impossible to tease out the effect it had on young people buying homes., including any differential effects it might have had on the kind of people who have student debt. Also, it is possible that student debtors disproportionately belong to the groups of young people who subscribe to the cultural shift away from home-buying.

2. Student Debt

This theory argues that because student debt is up among young people, they are not able to buy homes. Instead of taking out a mortgage, they must service their debt. This is Dayen's main theory.

The problem with this theory is that overall debt is way down. People below the age of 35 had 29% less debt in 2010 than they had in 2007. Even student debt among young people (at the median household level) fell slightly from $14,102 in 2007 to $13,410 in 2010

The student debt theory, in its cleanest form, is meant to be about young people swapping out mortgage debt for student debt. If that clean story was the correct one, you would expect youth debt levels to remain the same while the composition of youth debt changes. But instead, overall debt levels fell, by a lot. On the debts side of their balance sheets, the young have more room to take on mortgage debt than they used to have.

This discrepancy is not impossible to overcome for the student debt theorists. It could be argued that student debt is not crowding out mortgages in a 1:1 fashion (i.e. people with $20k in student debt reduce their mortgage debt by $20k by, for instance, buying a smaller house). Instead, student debt is causing people to just delay altogether, meaning that $20k of student debt might cause someone to avoid taking on a $100k mortgage. If that's generally what's happening in a ton of cases, you could see student debt simultaneously causing an overall debt decline and a reduction in mortgages.

3. Income

This theory argues that young people are buying less homes because they have less income. The Census tells us that the median income of those aged 15 to 24 fell between 2007 and 2011 from $10,986 to $9,808, a 10.7% decline. The median income of those between 24 and 35 fell 8% from $32,736 to $30,134.

Young people of all sorts faced massive negative income shocks as well as joblessness due to the Great Recession. With less income and facing considerable instability, young people were reluctant to get into a mortgage.

Personally, I find this theory the most persuasive and think it explains more of any home-buying decline than any other factor. It is also the least ambitious theory because it essentially just notes that all of this is happening during a huge recession and usually when that's the case, the recession is to blame. If this theory is correct, it suggests that if we ever do recover (meaning incomes and jobs for young people return), home-buying among the young will largely snap back.

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