Student debt may hurt housing recovery by hampering first-time buyers
February 18 2014
WASHINGTON — the growing student loan burden carried by millions of Americans threatens to undermine the housing recovery's momentum by discouraging, or even blocking, a generation of potential buyers from purchasing their first homes.
Recent improvements in the housing market have been fueled largely by investors who snapped up homes in the past few years. But that demand is waning as prices climb and mortgage rates rise. An analysis by the Mortgage Bankers Association found that loan applications for home purchases have slipped nearly 20 percent in the past four months compared with the same period a year earlier.
First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped. The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.
"This is a huge issue for us," said David Stevens, chief executive of the Mortgage Bankers Association. "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."
p>Stephanie McCloskey, 26, said she feels the pinch. Two years out of college, McCloskey was confident that she could take out a mortgage and buy a townhouse in Gaithersburg, Rockville or maybe Frederick, Md. — until she met with a lender last month. That’s when she realized she would not qualify for a mortgage large enough to pay for a home in the cities she was eyeing. According to her lender, the $500 she ponies up each month to repay her $30,000 student loan eats up too much of her income.
"I didn't know anything about buying a house when I took out a student loan, so it's almost like I'm being blindsided by a decision I had to make years ago," said McCloskey, an administrative assistant. The lending climate has become less forgiving for those carrying student debts, and that's unlikely to change anytime soon.
Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses. But the rules could also make it difficult for some buyers with student loans to obtain a mortgage. Take someone seeking a $626,000 loan with a 4.5 percent interest rate to buy an $800,000 house.
If that person earned $125,000 a year and had a $450-a-month car payment, he or she would fall within the limit, said Phil Denfeld, a vice president at First Heritage Mortgage in Fairfax, Va. But add a $100 student loan payment to the mix, and the debt-to-income ratio could climb above the new restriction.
This threshold already applies to some types of loans, including "jumbo" mortgages, which exceed $625,500 in the Washington area. But it will not apply to other types of loans for several years.