Student debt limits home sales, they say

Outstanding student loans passed credit-card debt for the first time last year, totaling nearly $1 trillion for America’s former college students and future homebuyers.

The average education debt for recent college graduates has grown to more than $25,000, with the unemployment rate for 25- to 34-year-olds at 9%.

This age group typically makes up half of first-time homebuyers and the percentage of 29- to 34-year-olds obtaining a first-time mortgage has dropped from 17% in 2001 to 9% in 2009-2011. At present, lenders refuse to lend to buyers who are already shouldered with a heavy debt load, barring many recent graduates from qualifying for a mortgage.

As first-time homebuyers are finding it difficult to obtain a home loan, the stagnant housing market cannot be revived by their entry into homeownership. This dearth of first-time buyers keeps sales volume and prices down.

first tuesday take: This is an old story for readers of these blogs in the first tuesday journal, since they already have this aspect of home sales built into their thinking. However, read on as we have more to say, and it is on the positive side of this portrait. Change is everywhere, but resistance – or laziness – is in the air.

Growing education debt will remain a growing problem for a couple of years to come as college grads are forced to return to university to avoid monthly payments on their educational loans as they cannot find a job with the income to make loan payments. The jobs are not out there no matter the effort expended, except for a few who luck out, and then at less salary than their professors suggest is proper.

Even if a recent graduate believes they have the means to purchase a home, they are at the mercy of lenders who rely on a FICO credit score which is often blemished by what lenders would call an obscene amount of education debt. But education debt has financed more education, and we all know that in the long run the standard of living will increase for all – you included (really).  Thus, brokers and agents will be selling more expensive homes in the future than in the past, as soon as the job market recovers. [For more information on the adverse effect of education debt on FICO scores, see the July 2011 first tuesday article, College debt makes graduates hesitant to become homeowners.]

Fortunately, first-time homebuyers burdened with education debt can still see their homeownership dreams come true (and buyer’s agents can dream of more closings), provided these buyer’s agents are willing to think outside the box and counsel their clients – all part of the new real estate paradigm. Intrafamily loans are becoming more popular, as parents or other more established family members loan or gift their children the down payment or mortgage financing. Yes, agents will have to learn about structuring loans, but learning and implementing is what recessions are all about. [For more information on intrafamily loans, see the October 2011 first  tuesday article, A win-win: intrafamily loans encouraged.]

Intrafamily loans are good for the parent – as they can consider the loan an investment in an era of negative real interest rates on savings (which was done to help bail out the lenders by keeping their costs of money at nearly zero), dangerously volatile stock prices and general public apathy about owning real estate today. Further, they are good for the buyer’s agent who benefits from a purchase that would not have been possible through institutional lending sources.

Additionally, intrafamily loans provide less risk of default as the borrower and lender are dealing with a family environment instead of an impersonal institutional one. However, if the intrafamily loan is actually a gift then the buyer lacks skin in the game, meaning he has a smaller stake in ownership and is more likely to default. [For more information on down payment gifts, see the January 2012 first tuesday article, Down payment gifts prevent skin in the game.]

Suburban housing arrangements have already begun to adjust to this phenomenon by providing multi-generational housing. Where a single user existed before the recession and jobs crisis, recent graduates who have no sufficient income to support leaving the nest are now willingly catered to. Everyone is figuring out how to win – except for the institutional lenders, but like blackbirds, they will soon flock together, relax lending requirements and fund more sales. It is in their bloodline to do so. [For more information on the long-term affect of multi-generational housing, see the February 2012 first tuesday article, Multi-generational housing is a temporary fix for economic woes.]

Re: “Student Debt Is Stifling Home Sales” from Bloomberg Businessweek