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How Student Debt Will Delay Home Ownership for College Students

How Student Debt Will Delay Home Ownership for College Students

(Wutthichai Luemuang | Dreamstime.com)

By Friday, 07 August 2020 04:09 PM Current | Bio | Archive

Over the years, older generations have blamed millennials for killing everything from breakfast cereal, to chain restaurants, to American cheese, to cable television. Most of these accusations were at least half-whimsical, but one accusation that was serious — and legitimately worrisome — was millennials’ failure to buy homes.

In 2015, only 37% of millennials owned homes, a rate that’s a full 8% lower than both Generation X and baby boomers at the same age. Although that percentage has crept up a couple points since 2015, the millennial generation still lags far behind their predecessors in terms of homeownership.

Why? There are a number of contributing factors. First, homes have become less affordable. According to a home affordability index maintained by the National Association of Realtors (NAR), homes became almost 20% less affordable between 2015 and 2018. Even with cost saving home buyer options like rebates and low down payment options, homeownership costs have steadily risen.

There’s also the matter of delayed marriage. Marriage is strongly correlated with homeownership, and millennials are getting married later than previous generations or not at all. In 1985. 75% of first-time homebuyers were married; today, only 57% are. Millennials are also having kids later — and having a child increases your chances of owning a home by 6%, according to the Urban Institute.

But the biggest factor holding millennials back from buying a home is student debt. Between 1969 and 2012, the average cost of a college education increased by 73%, and there was an accompanying surge in student debt. By 2012, 71% of college graduates carried some level of student debt.

As of 2019, American graduates owe a total of $1.59 trillion in student debt, which comes to an average of $37,172 per debtor.

A new study from Real Estate Witch surveyed 1,000 current college students ahead of the start of the fall semester about how the pandemic has impacted their finances. The survey found some disturbing patterns, especially when it comes to students' levels of personal debt. As hard as it was for millennials to buy their first home, it’s looking like it’ll be much more difficult for the next generation of college graduates. Let’s look at some of the numbers.

Students Are Doubling Down on Debt

Students are hurting financially right now — and how they’re dealing with that financial pain is going to have far-reaching consequences.

Although many students are committed to remote learning from their parents' home, many are going to be living in dorms or apartments in the fall. Nearly half, or 46%, of students are moderately or extremely concerned about paying rent during the year, and a nearly identical percentage (48%) are worried about being able to pay tuition for the year.

Many of these students’ families have also become poorer during the pandemic: 36% of students surveyed said a parent had lost income because of COVID-19, which directly affected their ability to pay for school.

So, how are these students planning on making up any shortfalls? By taking on more debt.

Almost half, or 48%, of college students are borrowing more as a result of the pandemic, and 33% of students are taking on at least $10,000 more in student loans than 2019.

Equally disturbing is the fact that college students have an imperfect understanding of all that debt they’re taking on. Of students surveyed in a student debt study by Clever Real Estate, 76% thought they would be able to pay off their debt in 15 years or less; in reality, it takes an average of 21 years. Even more disturbing — more than half of college students don’t even know the interest rate on their student loans.

Students May Suffer — but So Will the Housing Market

When you’re carrying big debt, the big purchases are the first things to be delayed; 48% of college students with debt say they plan on putting off homeownership, according to the Clever report.

There’s hard data to back this up, too. A study from the Federal Reserve found that a $1,000 increase in student loan debt equals a 1.5% decline in the homeownership rate, which comes to about a 2.5-month delay. For a holder of that $37,100 average amount of debt, that comes to a 7.7-year delay in buying a home.

So, millennials may be buying homes at a much lower rate than baby boomers did at the same age, but they also paid four times more for education — and that, more than anything, is why they’re buying fewer homes.

As hard as it is for millennials — and it’s very hard; 69% of millennials say they flat out can’t afford to buy a home — it will likely be even harder for the generation of future college graduates who are still in school.

The number of job openings in the U.S. is way down in the pandemic, and the qualifications for those jobs are getting tighter. Throw in skyrocketing levels of personal debt and a housing market that’s getting less affordable, and you’re looking at a generation who’s going to have to put off homeownership for quite a while — or maybe forever.

Using the numbers above can give us a rough estimate of how much longer today’s students might have to wait to buy a home.

If the average $37,000 student debt burden translates to a delay of 7.7 years and 33% of today’s students are taking out an additional $10,000 in loans to deal with pandemic-related difficulties, those students are potentially looking at a solid decade of waiting before they can buy their first home.

Americans agree that 28 is the ideal age to buy your first home, but millennials had to wait until they were 35 or 36 to enter the housing market. Today’s debt-heavy students are looking at waiting until they’re 40 years old — just to buy a starter home.

How will this affect the housing market? No one knows for sure. This is just one data point, and there are countless other factors that will shape the economy of the future. But although we may not know exactly how the money college students are borrowing right now is going to affect tomorrow’s housing market, we do know it’s probably going to have dramatic effects.

Dr. Francesca Ortegren, Ph.D. is a Research Associate at Clever Real Estate where she focuses on helping people understand complex data, real estate, finances, business, and the economy by researching various topics, analyzing data, and reporting useful insights for general consumption.

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How Student Debt Will Delay Home Ownership for College Students
student, debt, home, ownership, college, students
Friday, 07 August 2020 04:09 PM
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