Student debt delays first-time buyers
WASHINGTON — First-time buyers are missing in action in housing markets across the country. Traditionally first-timers have accounted for around 40 percent of resale purchases. But in May, according to the National Association of Realtors, they were just 28 percent, down from 29 percent in April and 34 percent a year ago.
Big deal? Yes. If predominantly young, first-time purchasers are not entering the homeownership pipeline near their traditional rate, at some point the system begins to choke. Owners of modest-priced starter homes find it more difficult to sell and move up. They in turn can't buy the larger homes they crave, reducing demand for houses in the more expensive categories. A shortage of first-time buyers at the intake level eventually triggers problems all the way up.
Where are these previously dependable first-time homebuyers in their late 20s and early 30s? A lot of them are carrying such heavy debts from student loans that they're postponing buying houses.
Researchers for the One Wisconsin Institute found that the rate of homeownership among individuals who are paying off student loans is 36 percent lower than their peers who have no student debt. The disparity can be seen at all income levels. Among individuals who earn $50,000 to $75,000 a year, those who are still paying down student loans have a 28 percent lower rate of homeownership compared with others in the same income group.
Bulging student-loan balances aren't short-term issues. The institute's study found that the average payoff time is 21 years, ranging from 17 years for those who attended college but did not get a degree to 23 years for those with graduate degrees.
Worse, student loans are exhibiting high default rates — currently about 13.4 percent. That depresses credit scores and makes it more difficult to qualify for a mortgage under toughened standards.
Even financial regulators acknowledge the troubling link between student-debt loads and declining home purchases. New York Federal Reserve researchers recently said heavy student-loan balances that limit access to credit "may have broad implications for the ongoing recovery of the housing and vehicle markets, and of U.S. consumer spending more generally."
Total outstanding student debt now exceeds $1.1 trillion. Debt loads for recent graduates average just under $27,000, but an estimated 13 percent of outstanding balances range from $54,000 to $100,000.
Student debt troubles are hardly the only barrier keeping first-timers out of the market, however. Stan Humphries, chief economist for Zillow, the online real estate site, says there are three other important reasons behind the trend:
• High down payment requirements for conventional loans — averaging nearly 20 percent.
• Persistent negative equity problems among the owners and potential sellers of starter homes that first-time buyers traditionally could afford are keeping those properties off the market because owners don't want to take a loss at settlement.
• For those affordable homes that become available, first-time buyers frequently lose out to investors who can pay cash.
Problems like these aren't likely to go away soon, Humphries believes, but they could improve. For example, financing terms could loosen up as interest rates rise and lenders who have been feasting on refinancings are forced to reach out to purchasers with more favorable deals. And, as home prices rise, investors are likely to cut back on their purchases of starter homes for rentals, thereby opening new doors for first-time buyers.