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4 Worrying Trends in the Student Debt/Homeownership Relationship

by Peter Thomas Ricci

Home purchases have skidded a bit in recent weeks, and student debt raises some troubling questions on where housing demand is heading.

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The numbers are in, and they’re not encouraging – housing demand is beginning to wane. According to recent analysis by the Mortgage Bankers Association, rising home prices and mortgage rates have scared away investors and pushed loan applications down nearly 20 percent in the last four months, and they are now at their lowest mark since Sept. 2011.

Real estate professionals are wondering what will take investor’s place, but one thing is certain – student debt, and the consumers burdened by it, are unlikely to fill that void.

Here are four trends that you should be aware of regarding how student debt will affect housing:

1. Student Debt Affects First-Time Buyers – First-time homebuyers are an essential component to the housing market, but over the past year, they’ve made up just one-third of all buyers, which is far below historical averages. Student debt, many analysts argue, is a prime reason for that low market share, and for good reason; such debt has tripled from a decade earlier, and now exceeds $1 trillion; short of mortgage debt, student debt is now the largest consumer debt obligation in the U.S.; and finally, from 2009 to 2012, the homeownership rate fell at twice as much for 30-year-olds with student debt.

2. Student Debt Constrains Finances – The reason that student debt would harm first-time homebuyers is simple. Because of the debt, consumers are unable to either save for a down payment or qualify for a mortgage. In a recent NAR survey, of the 20 percent of first-time buyers who had difficulty saving for a down payment, 54 percent said student loans were to blame.

David H. Stevens, the chief executive of the MBA, recently told the Washington Post that student debt is a pivotal topic for the association.

“This is a huge issue for us,” he said. “Student debt trumps all other consumer debt. It’s going to have an extraordinary dampening effect on young peoples’ ability to borrow for a home, and that’s going to impact the housing market and the economy at large.”

3. New Mortgage Rules Could Make it Tougher – Qualified Mortgage (QM) standards are, for the most part, a good thing. They lay out a clear road map for securing home financing, and they make it tougher for banks to indulge in risky loans. Yet, there’s one group that could be impacted by QM standards – those with student debt. For a mortgage to be officially “qualified” for the government, a consumers total monthly debt cannot exceed 43 percent of their monthly gross income.

With student loans, though, that can be a difficult standard to meet. As the Post explains: if someone earning $125,000 a year secured a $626,000 loan with a 4.5 percent interest rate to buy an $800,000 house, they’d be within the limit, assuming they only had a $450 monthly car payment. Add on a $100 student loan payment, though? That tips the balance, and the consumer, even with that level of income, would no longer qualify.

4. Don’t Count on the FHA – Ever since lending standards tightened, many a homebuyer has counted on the FHA for less stringent lending standards, but for those with student debt, the honeymoon may soon be over. According to the Post, the FHA is thinking of eliminating its student debt waiver, which allows mortgage lenders to ignore student debt that is deferred for a year or more.

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