Unpaid School Loans Weigh Down on Housing Recovery

by 21 Apr 2013

Many first-time home buyers in the United States face more than just a difficult mortgage lending environment that prevents them from achieving the American Dream of homeownership. Student loans are increasingly becoming insurmountable obstacles that reduce home-buying opportunities at a time when the U.S. housing market needs first-time home buyers to sustain the ongoing recovery.

A recent CNBC report features a couple who could have qualified for a mortgage to purchase their very first home, but school debt got in the way. The couple in this case have accumulated more than $100,000 in school loans, which require a monthly payment of $1,100. Both applicants are employed, although one of them is working on a contract basis. These mortgage application factors effectively prevented them from getting their first home.

Massive Growth of Student Loan Debt

The Federal Reserve Bank of New York estimates that the collective school debt in the U.S. currently tops $1 trillion. This reflects a 300 percent increase from 2004 to 2012. Now that many real estate analysts expect that the housing market recovery will level off this year, the high numbers of first-time home buyers saddled with unpaid school loans may actually weaken the recovery.

Another unfortunate factor of this monumental debt involves a rising level of delinquency among borrowers. The Federal Reserve Bank estimates that one-third of school loan borrowers are late or delinquent on their monthly payments. These borrowers are likely to be barred from entering the mortgage markets for the next few years.

The Effect of School Debt on Home Prices

First-time home buyers are not the only consumers affected by student loan debt. Jumbo mortgage applicants usually need excess income to qualify for luxury home purchases; when their income is weakened by high student loan monthly payments they may not be able to acquire high-end real estate. Sellers are also being impacted by student debt in the sense that they may have to adjust prices downward.

The housing market recovery has thus far been highly dependent on a recovery of median home prices. When first-time home buyers who have amassed school loans are the only prospects left, sellers may feel pressured to lower their asking prices in order to accommodate buyers. Should this trend spread out, the budding recovery of the housing market could be eclipsed by falling prices.