As home values have fallen over the past several years, some of the burden of financing higher education has shifted from parents to students. Declining home equity has limited the ability of parents to tap what once seemed like a unlimited ATM machine for college financing. The Federal Reserve reports US household wealth has dropped 40% in the period of 2007 to 2010, largely due to declining home equity. College students have been forced to take on a greater share of financing their rising college costs.
College graduates amass an average student loan obligation of $25,000 at the end of their college years. Student loan debt is the fastest growing form of consumer debt, it has steadily risen while all other types of debt have been shrinking over the past several years.
Coupled with a tight job market for college grads, many graduates are faced with student debt that consumes 25% or more of their monthly income. With the average length of student loan repayments being 10 years, college grads are facing a difficult time in achieving a balance of student loan debt and other consumer debt, such as credit card and automobile loans.
Mortgage underwriting guidelines generally stipulate that a borrowers total debt limit can not exceed 41% of income. If a quarter of one’s debt is dedicated to student loans, there is very little room is left for shouldering the additional cost of a new mortgage, even at current record low interest rates.
In short many college graduates are being shut out of the housing market for up to 10 years after graduation until student loan obligations are paid off. With first time home buyers being an integral part of the housing market, the percentage of which has been declining over the past several years, housing demand is falling among this key group.
First time home buyers purchase the homes that allow former first time home buyers to move up into a larger home. When first time home purchases stall the whole market puts on the brakes. It is basic economic theory that falling demand results in falling prices.
As the younger generation faces the challenge of increasing debt, the housing market faces another hurdle toward a meaningful recovery.
Wallingford Real Estate – Wallingford, PA 19086
