4/9/2012 11:07 AM ET|
Student debt is stifling home sales
Students burdened by education loans may not be able to get a mortgage to buy their first homes -- bad news for the housing market.
Roshell Schenck has a Ph.D. in pharmacy and earns $125,000 a year. Yet, because she has more than $110,000 in student loan debt, counselors have told her she can't qualify for a mortgage.
"I'd love to buy and can afford to buy," says the 28-year-old graduate of Lake Erie College of Osteopathic Medicine in Erie, Pa. With lenders scrutinizing college loans more closely than in previous years, it's almost impossible for borrowers such as Schenck to get approved for mortgages. "My debt is crushing my chances of purchasing a home."
Last year outstanding education debt passed credit card debt for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Totaling close to $1 trillion, America's mounting pile of outstanding student debt is a growing drag on the housing recovery, keeping first-time homebuyers on the sidelines and limiting the effectiveness of record-low interest rates.
According to a recent Federal Reserve study, only 9% of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17% 10 years earlier. "First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly," Federal Reserve Chairman Ben Bernanke said at a homebuilders' conference in Orlando, Fla., on Feb. 10.
Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they're able to land a job in a market with an unemployment rate of 9% for 25- to 34-year-olds. Dubbing it a "student loan debt bomb," the National Association of Consumer Bankruptcy Attorneys warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans and older Americans who've gone back to school for job training.
"Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future," John Rao, NACBA vice president, said on a conference call.
People aged 25 to 34 made up 27% of all homebuyers in 2011, the lowest share in the past decade and 6 percentage points below their 33% share in 2001, according to the National Association of Realtors. "Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries," says Rick Palacios, a senior research analyst at John Burns Real Estate Consulting in Irvine, Calif.
Palacios says first-time buyers are key to a housing recovery because they allow current owners to move into larger, pricier homes. "Move-up buyers need somebody to purchase their homes to move," he says. "You need that first leg in the recovery to materialize."
Since the overall number of first-time homebuyers has fallen, people aged 25 to 34 still accounted for 52% of that group last year, near the average since 2005, according to the Realtors group. Still, almost 6 million Americans in that group lived with their parents in 2011, up from 4.7 million when the recession began in 2007, according to U.S. Census Bureau data.
Although housing prices have fallen by about one-third from their 2006 peak, young adults who are starting to move out of their parents' houses want to rent, not buy. While single-family housing starts posted their worst year since 1963 last year, multifamily housing construction has surged as more Americans rent.
It may take years before young people return to the market as homebuyers. For her part, Schenck, who lives in Waterford, Pa., and works as a pharmacy manager for a grocery chain, still wants to buy at some point. She's trying to build enough savings for a larger down payment, to increase her odds of getting a mortgage.
"I haven't given up hope of one day owning my own home," Schenck says. Still, "the dream feels like it's farther out of reach than I ever thought it would be."
More from Bloomberg Businessweek:
VIDEO ON MSN MONEY
KDfree: Do you live on Planet Earth? STFU, douchebag
As other posters mentioned, it is impossible to work in college and earn enough to pay for school as in the good old days. College costs are 4 times the cost in 1980, 6 times the cost in 1970.
Student loan debt is real. If you are not a minority or have parents that can pay for it, student loans are the only way to finance one's undergraduate studies. And even for minorities, it takes financing for graduate, doctorate and professional degrees. The colleges and universities keep hiking tuition and book costs. And the government supports this by increasing the amounts that students can borrow in order to get their degrees.
The end result is that if you graduate with a graduate degree or doctorate degree you will most likely have over one hundred thousand in student loan debt. Just like the mortgage companies that allowed those who would normally be unable to qualify for mortgages, qualify for mortgages way beyond their means. The government has afforded the same type of irresponsible student loan debt. If the money wasn't there, the colleges and universities would not be able to raise tuition carte blanche as they have. And student loan debt would not be what it is today.
The problem with student loans is so simple. The government got involved and made these student loans too easy to get and virtually impossible to discharge in bankruptcy. These loans are such an ironclad contract the almost the only way out is to die or pay them off.
Wages have not grown since the 1970's, sure you make more money but it doesn't buy as much, but the cost of college has gone up a lot.
Fro these two reasons the government and mostly the banks are creating a student loan bubble and the bubble will burst.
I don't think there are any easy solutions to this student loan mess, but they could try lowering the interest from 6% to 6.5% to 2%. if you can buy a car at 2,25% to 4%, which is more of a risk to a lender then why can't these loan's interest rate be lower? This would allow borrowers to at least pay them off faster in cases like this one.
Making 125K a year, hoping to save up more for a down payment. Jesus, 125K a year, I would save enough in about 5 years to buy the house without a mortgage.
if you are in forebearance or grace on your student loans, banks are taking the liberty of assuming your monthly obligations on the loan since the monthly payment shows up as $0 on your credit report. They automatically assume a 5 year repayment, which ends up increasing your debt to income ratio astronomically! I am a new graduate surgeon, I earn over 300k a year with my job plus moonlighting and the bank refused me for a $500k mortgage! becuase one of my loans was in grace period, they took the liberty of assuming/calculating themselves the repayment at $4500 per month instead of $500 per month!... I had to go through a lot of training and education to become a surgeon.... I'm wondering where these underwriter's were trained/educated... not the sharpest tools in the shed.... is this a job you can get straight out of high school? and why do they have so much power in one person to accept/deny loans??? the banks are killing us... they're sitting on loads of money....
The good old days? - that is why they are referred to as " the good old days". You COULD actually work and pay for college. Now days college costs have increased over 500% from the good old days, rents have increased several hundred percent,, food costs have more than tripled, gas proces have increased more than 200 percent but salaries have NOT. - you do the math. There is no possible way to "work" and go to school and pay for it while working. If you could make that much money around $6000 a SEMESTER ( this does not include food, place to live, books, transportation, helath care, etc).- why go to school in the first place?
Maybe she should just pay off the student loan, hello she makes 125,000 a year. She could rent for 2 years and pay it off, how novel. Maybe occupy wallstreet could help this poor girl!!
Hmmm... Making $125k/year and $110k loan debt. First, You probably cannot afford to buy at this point. Second, $110k student loan debt. You probably should have looked a little more closely at the return you would be getting for your investment. Third, With that sort of income, pay off the student loan; should only take you a few years and then buy a house in your early thirties. Better yet, save for a few years and then buy a house without a mortgage or with a vary small mortgage. That's better financial planning.
Student loans are not a good thing. I took out one once when I was a student and I quickly realized that said debt well could kill everything I was working for. It took me two years to pay that one semester loan off but when I graduated, I was debt free. Student loans are silent killers of dreams.
Buying a house is NOT an investment. It's more equity than investment, and in reality, It's only a place to live.
Government subsidizes housing, home pricing goes through the roof
Government subsidizes health care, health care goes through the roof
Government subsidizes college tuition, college cost goes through the roof
That's the fallacy of government "aid".
It's a visous circle, most people can pay $25K, but some can't so college costs $25K. Then $25K student loans come in to help those who can't afford it but you can afford $25K plus the $25K loan so college costs $50K. Now those that can't afford it have to borrow $50K but you can still afford $25K + $50K loan so college costs $75K.
The easier the money the higher the inflation, in all three economic segments.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
RECENT ARTICLES ON DEBT MANAGEMENT
A new survey reveals Americans are most embarrassed to admit their amount of credit card debt.
MUST-SEE ON MSN
- Video: Easy DIY smoked meats at home
A charcuterie master shares his process for cold-smoking meat at home.
- Jetpacks about to go mainstream
- Weird things covered by home insurance
- Bing: 70 percent of adults report 'digital eye strain'