Impact of Student Debt on Future Housing Demand

By Selma Hepp, Ph.D., Senior Economist
California Association of REALTORS®, Research and Economics

At May’s midyear legislative meetings held by the National Association of Realtors in Washington, DC, a panel of experts in a session titled “Shifting Demographics and Housing Choice: A Whole New World?” discussed future housing market demand and trends to keep in mind as we think about the future of housing in the U.S.

The biggest takeaway was that baby boomers will increasingly contribute to housing supply as they age, yet echo boomers are in a difficult position to absorb the inventory. The echo boomers, also called Millennials, are those currently ages 17 to 31, and account for 62 million people. And although future housing demand highly dependents on different rates of household formation among Echo Boomers, this generation is in a precarious position.

In addition to having seen the worst housing downturn, these younger buyers have been hit hard by the recession. Faced with an uncertain job market, no real income growth, tighter mortgage lending rules, and mounting student and credit card debt, it is no surprise that some of them do not put priority on homeownership.

The concern over student debt is particularly alarming. According to a number of recent research studies, college seniors who graduated with student loans each owed an average of $25,250, up significantly from an average of $12,750 in 1996. Parents have accumulated student debt as well, $34,000 on average. The aggregate amount of student loan debt in the U.S. is over $1 trillion currently. The pace at which debt is mounting adds to the concern. Between March 31, of this year and 2011, student loan debt rose by $64 billion. However, over the same period, all other forms of household debt fell by $383 billion. Put another way, since the peak in household debt in the third quarter of 2008, student loan debt has increased by $293 billion, while other forms of debt fell by $1.53 trillion.

The rise in student debt is attributable to rising cost of education. Since 1978, the cost of tuition in the U.S. has increased more than 900 percent, 650 points above inflation. Between1990 and 2010 alone, tuition rose by 116 percent while the median household incomes inched a mere 2.1 percent.

There are some variations across states though. California ranks 46th among the 51 states – with average student debt at $18,113. New Hampshire ranks 1st with highest average debt at $31,048. Also, in California, about 48 percent of 2010 graduating class had student debt, while in New Hampshire 3 out of 4 students had student loans. But even within California, student debt ranges widely, particularly between public and private institutions. While debts from public colleges reaches $24,000, some private college students have walked out with over $50,000 in student debt . Figure 1 depicts the change in total cost of attendance and average debt of graduates for the last decade for California institutions for 4-year or above college education. One startling point to note is that total cost of attendance has been growing faster than average student debt of graduates. One reason for that may be that parents are picking up more of the costs.

So, how does the increasing student debt play into home buying process? Student loan payments are included in Debt-to-Income ratio. The ideal 33 percent of debt-to-income includes student loan payment, car payment, credit card payments and the monthly mortgage payment. Table 1 below provides a simple estimate of the impact of student loan debt on one’s ability to afford a mortgage payment. With recent discussion around doubling of current student loan interest rates from 3.4 to 6.8 percent on July 1, there are two scenarios included. The first one looks at the impact of an average $19,000 loan facing recent California graduates and the second scenarios illustrates the impact of higher student loan debt, $50,000. In both cases, student loan payment increases with doubling of interest. While the average student debt impacts mortgage payment by 2 percent, the larger debt has a 7 percent impact on the mortgage payment. In either case, student loan payments matter in evaluating debt-to-income ratio for potential new homebuyer.

Given the already very large federal deficit an additional government spending in form of interest rate subsidy to students must be viewed cautiously. Such issues as college administration staff and salaries, which may be raising overall tuition must also be examined. Still, it is worth analyzing the growing student debt load and its potential impact to future home buying.

For questions, please contact the Research & Economics Department at or (213) 739-8352.

1. College InSight:

  1. If you take the top 10% of Americans out the equation in terms of income, and have a long outlook on housing when inflation and rates rise. There will be your problem because not only do we not have the job growth here in the US. We don’t have the income growth to off set future inflation and rates.

    Even now, we have low taxes, low interest rates and poured Trillions of dollars into the system and all we can muster at this point of the economic cycle is sub 2% growth with anemic job growth. The same problem in housing ” We simply don’t have enough qualified home buyers (excluding cash buyers) to take on the true inventory” is the same with a consumer based economy we have. We simply don’t make enough money after taxes and debt to give us 3% GDP growth. This is a problem with boom and bust BUBBLE economic cycles we have had since 1996. It mask our true economy.

  2. Craig

    You list gross monthly income as $7000. That’s $84,000 per year. That seems quite optimistic for younger people. With younger people hit really hard in the job market, you should count on this being much less. Which will be a further negative on future housing demand.

  3. Person of Choler

    The boomers themselves will be the real losers when they try to sell their houses to people who can’t afford to buy them. The price of housing won’t inflate any faster than allowed by the incomes of potential buyers, interest rates, and property taxes.

  4. Don

    Interesting blog post. Student debt is problem, but only where it is not associated with increased income, which I think is the bigger trend.

    I am convinced that the biggest problem facing real estate is depressed NGDP. If the Fed was using an NGDPLT strategy, average income in the USA would be 10% higher and home values would be >10% higher. That would be enough improvement to unlock most trapped (underwater) homeowners and boost mobility/relocations. Why don’t the economists working for or studying the real estate industry promote NGDPLT?

  5. Joe Osbaldeston

    Having spent over 25 years in financial planning the car payments have always been the biggest reason people don’t qualify for mortgages, ratio wise.

    Looking at your 2 examples shows nothing has changed. And likely those young people driving new cars no doubt will chage cars ever 3-4 years and never pay a car off. Young people should pay off debt before buying any newer car.

    Also, all the brew ha ha over rising interest rates on student loans by these examples reveals no big thing, about $30.00 a month for the 19K debt.

    The govt has been subsidizing education for way too long and these subsidies raise the cost of college, hardly making it more accessible when you consider long term results, drop outs and debt. Clinton added gravely to the higher cost of college by making it deductible for some and tax credits. All of this is Ledgerdemain and a gift to colleges. Stimulating higher prices.

    The next Gen 17 to 31 don’t have the same values or family structure as the Boomers enjoyed which necessitated larger homes. Big houses over 3,000 Sq feet will suffer huge declines in the next 12 years.

  6. Ryan R

    Just because I am a single male doesn’t mean I don’t want 3000+ square feet to lounge around in. Hell, one of the reasons I chose not to have a wife or children was so I could afford a 3000+ square foot house and pay it off before 10 years.

  7. Nate

    Just skip the wife and kids. Single male adult, age 37, 100k++ If you don’t get married you will have a lifestyle you cant imagine. Married? Get used to ramen noodles.

  8. Noek Pouw

    Any information about the effect off rising student loan debts on demand for student housing? Falls? Lesser quality?

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