Student Loan Debt and Inventory

Student debt has grown significantly in recent years and with it concern over the impacts on first-time homebuyers. However, limited to no attention has been paid to the connection between student debt and constrained supply. A significant share of owners with student debt report that their student debt has or will delay their trade-up purchase. This problem also holds back entry-level supply from would-be first-time buyers. While increased trade-up sales would help to ameliorate tight entry-level supply, a number of constraints remain including negative equity and limited construction which must be addressed to fully solve the supply shortage.

First-time homebuyers face issues with student debt, tight credit, a soft job market, and limited housing supply. Higher student debt levels constrain first time buyers by raising their back-end debt-to-income ratio and by making it more difficult to accumulate a down payment. However, student debt also impacts current homeowners by limiting funds to build up a trade-up down payment, to pay down negative equity, and to service debts thereby affecting credit scores. According to NAR’s Student Loan Debt and Housing Report 2016[1], 31 percent of homeowners who have student debt report that their student debt has caused them to delay their next home purchase and 73 percent indicated the delay was 3 or more years. This means that each year, a certain number of trade-up sales do not occur, limiting the available supply for would-be first time homebuyers.

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 How significant is the problem?

Price growth has been strongest at the entry-level portion of the market due to low supplies as depicted in the chart of months supply below. This imbalance suggests that the market would readily absorb an increase in entry-level supply.

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 The number of delayed trade-up sales is depicted in the table below.[2] The market impact may be sensitive to the turnover rate, so a range of estimates is provided. This analysis suggests that each year roughly 107,000 to 131,000 repeat sales do not occur due to student debt. However, these trade-up sales release supply, likely entry-level supply, to the market that could be consumed by first-time buyers (or investors/renters). Thus the total impact is closer to double this figure.

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Trade-up buyers would likely move into price-points in the market with more supply and where builders are more likely to meet demand though land, labor, financing, and regulatory issues constraint builders at all price points. However, not all trade-up buyers may find the “right” home in the current market of tight supply.

Where Does Student Debt Constrain Supply?

At the local level, the states with the highest level of owners with student debt held back from a trade-up purchase are in California, Texas, New York, Florida, and Ohio. These areas tend to have large populations, but some are also hot-spots for younger buyers.

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 Implications for First-Time Buyer Share

NAR’ Profile of Home Buyers and Sellers revealed that the first-time buyer share jumped from 32 percent in 2015 to 35 percent in 2016. An increase in entry-level inventory would likely result in greater first-time buyer participation and it would ease price pressure in this segment. If trade-up demand were to rise as estimated above and all current owner’s homes sold to first-time buyers, the first-time buyer share would rise to a range of 35.6 percent to 35.7 percent, still well off the 40 percent historic norm for primary residence buyers. Over 5 years, this could increase first-time homebuyer sales by 550,000 to 700,000 and total sales could rise by 1.1 to 1.4 million in the short term. [3]

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 However, student debt is not the only factor impacting entry-level supply. Nearly 3.2 million owners remain underwater and the share of underwater owners is higher in the entry-level price range.[4] Furthermore, investors bought up a significant number of entry-level units in the wake of the great recession turning those properties into profitable rentals that are not likely to return to the market. Finally, builders remain constrained as noted above. While an increase in supply due to higher trade-up purchases might help to ameliorate the supply issue, it would not resolve it.

The impact of student debt on first-time buyers’ finances has been widely discussed. Student debt also has an impact on entry-level supply and the trade-up process. Addressing student debt will pay dividends on both the demand and supply side for housing.


[2] These estimates are conservative in that they do not include private loans.

[3] One might argue that this purchase delay simply shifts demand into the future. However, it could cause price and construction distortions in the short term and limits the equity accumulation of owners in the short-term and long-term as this delay is persistent.

[4] Corelogic

Ken Fears, Director, Regional Economics and Housing Finance

Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.

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