Wednesday, February 29, 2012

Student Loan Debt Is Stifling Home Sales

Today must be the day for posting news articles that confirm previous assertions I have made here before on TDS. Dove tailing with this morning's post about how the jobs now being added to the economy are lower paying and have fewer benefits than those destroyed during the financial crash, here comes a story from Bloomberg Businessweek about how student loan debt is helping to stifle a recovery in the housing market:
Last year outstanding education debt passed credit-card debt for the first time, according to Mark Kantrowitz, publisher of, 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 home buyers on the sidelines and limiting the effectiveness of record-low interest rates.

According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier. “First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly,” Fed Chairman Ben Bernanke said at a homebuilders’ conference in Orlando 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 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) 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, vice president of the NACBA, said on a conference call.

People aged 25 to 34 made up 27 percent of all home buyers in 2011, the lowest share in the past decade and six percentage points below their 33 percent 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 home buyers has fallen, people aged 25 to 34 still accounted for 52 percent 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.
That quote from Bernanke really makes my head hurt given that every Federal Reserve policy since the financial crash has been designed to prop up the big banks, and yet there he is admitting that the economy cannot recover unless real people have money in their pockets. The housing market remains deeply mired in the doldrums despite the Fed's Zero Interest Rate Policy driving 30-year, fixed rate mortgages below 4%. Bernanke is basically admitting that the Fed policy has been a complete failure, and yet still no one in authority has called him on it.

Bonus: If you've got the time, here is "Loan Me a Dime"


  1. “Move-up buyers need somebody to purchase their homes to move..."

    Move-up home buyers need real income growth and easy, cheap credit (right now, it's cheap but not easy) to move up. They also need some Greater Fool to pay over-market price for their over-leveraged current home, so they can pay off existing debt in order to qualify for greater debt to buy that new McMansion.

    Anybody see that happening anytime soon?

  2. I love this one: 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.

    Like that model is really going to come into play again anytime soon! If anyone, especially older folks, are able to unload what the are saddled with now, I'm pretty sure they are going to be looking to 'move, but most likely in the other direction, perhaps in another country.