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We Still Don't Know How Much Student Loans are Impacting the Housing Market

Mark Huelsman

There's a new report from RealtyTrac that's generating some buzz this week, claiming that student loan debt is not holding back the ability to buy a house in the vast majority of U.S. markets. This kind of contrarian stat tends to generate news, so it’s worth pulling back the curtain on it a bit. Doing so shows that the claims that are inevitably going to come from this – that student debt is a minor nuisance at most – aren’t particularly supported by the report.

What RealtyTrac actually says is that a recent graduate with average levels of debt, employed, making the median household income, could afford to make housing payments up to 43 percent of income, assuming they make a down payment of 20 percent and qualify for a 30-year fixed rate mortgage.

If you look at these assumptions piece-by-piece, it’s hard to see how many student loan borrowers actually fit this mold.

First, did a borrower graduate? Given that less than 60% of college students graduate within 6-years, and around a third of student loan borrowers drop out of school, this removes a lot of young people from our sample. Not to mention, the RealtyTrac report seems to assume the borrower earned a four-year degree, which only accounts for about two-thirds of all degrees.

Second, did that borrower find a job? From EPI, we know that unemployment for recent graduates is 8.5%. Young black college graduates face much higher unemployment rates. Unemployment among younger workers is always higher than among older workers, but these percentages are still far higher than before the recession.

Third, is the graduate making the median household income? Average starting salary for a recent graduate is slightly over $45,000, less than median household income in literally every state.1  Underemployment for recent graduates is also rampant, and even RealtyTrac report says that student debtors need to make an average of about $9,000 more a year than graduates without debt in order to afford a home.

Fourth, could this graduate even qualify for a loan? Credit scores for student debtors are lower than those without debt (which is a new phenomenon, as this Brookings paper shows). Meanwhile, student loan debt is the only type of debt in which delinquencies have actually risen after the recession, and it’s not getting better. Default rates on student loans are the highest we’ve seen in 20 years. And this doesn't even touch on whether or not a student borrower has enough cash-flow for a 20 percent down payment.

So the borrower being described by RealtyTrac isn’t exactly a unicorn, but he or she isn’t exactly common either.

Here’s what we do know.

We know that homeownership rates have fallen faster among young people with student loan debt than those without debt. We know that young people have been noticeably absent from the housing market in general. We know, again, that delinquencies and defaults on student loans are up, which is probably contributing to lower credit scores for student debtors.

It’s hard to make broad causal inferences about student debt and homeownership among recent graduates, because there are simply too many factors in play. Many assume student debt is a one-way ticket to graduation, which it’s not. The student debtor with a degree is a fundamentally different person in the economy than the one without a degree. Many assume that college graduation is a one-way ticket to a good job, which it’s not (though you’re obviously likely to be in far better shape with a degree than without it).

Of course, on the other hand, we don’t necessarily know that student debt is having a 1-to-1 impact on homebuying. Perhaps millennials just want to spend their money elsewhere. But it’s hard to argue that student debt isn’t having some impact on the ability to buy a house – not when average and aggregate debt has continued to rise, unemployment is relatively high, and incomes are relatively stagnant. Basic arithmetic says something has to give.

It’s not hard to see why it makes sense to promote a story in which student loans aren’t a hindrance. If you want more people buying homes, it’s a good idea to downplay their other financial burdens. And frankly, for recent graduates with a good job, it’s good news that homeownership is still a possibility in the majority of U.S. counties. But let’s not assume that the hypothetical potential homebuyer here is anything close to the norm of someone who takes out student loans.

  • 1Judging by the RealtyTrac release, it’s difficult to determine what their income assumptions are. For example, a two-person household in which both have graduated from college and are making the average starting salary would be above the national median household income. But again, this is a pretty small slice of the pie.