The American dream of going to college, finding a good job, finding a nice house to live in, and raising a family seems to be becoming less and less of a reality as the days go by. Some experts say part of the reason is the growing student loan debt that many are carrying with high monthly payments that are as much as some mortgages.
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In the statement released by the White House last week outlining President Joe Biden’s goals for providing new student loan repayment relief, it was noted that there are currently 43 million people with this type of debt.
Most carry balances of around $25,000, which equates to more than $1.6 trillion for all US borrowers combined. Given these numbers, it’s no surprise that real estate ownership seems out of reach for many after the baby boomer generation — especially since the White House notes that the price of a 4-year public or private education has tripled since 1980, making it even harder to buy a home in more recent decades.
A new survey from the National Association of Realtors confirms this. It was found that 60% of millennials said student loan debt was one of the biggest barriers to their ability to buy their first home.
Jessica Lutz, vice president of demographics and behavioral insights at the National Association of Realtors, told RISMedia (a real estate magazine) that having student loan debt becomes imperative because it prevents someone from saving funds for a down payment. Additionally, she noted that the large debt-to-income ratio affects “the type and size of a home they can buy.”
A 2019 study in the Journal of Labor Economics, as noted by RISMedia, also found a close relationship between the two – finding that every $1,000 added to someone’s student loan debt resulted in a 1 in 2% less likely homeownership for those in their mid-20s.
Which begs the question: With the cancellation of Biden’s $10,000 student loan on the horizon, will this impact the housing market and allow new homeowners to enter the market ?
In a recent GOBankingRates poll, readers were asked what they would spend their money on if their student loans were forgiven and a large majority said they would buy a home. In fact, 22% noted this option, including 48.18% of 18 to 24 year olds and 45.33% of 25 to 34 year olds who are most likely to become homeowners for the first time.
But before assuming that Biden’s new program of offering $10,000 in debt forgiveness (to those earning less than $125,000 a year) will lead to a shopping spree, some pundits fail to see the correlation and would argue that ‘there will be no immediate impact.
“I don’t think student loan forgiveness will have a major impact on buying a home, or at least not an immediate impact,” said Damian Dunn, CFP® and vice president of counseling at Your Money Line. , in an interview with GOBankingRates. . “Maybe 12 to 18 months later, once people have adjusted to their new situation and found some financial stability, then they can make bigger housing decisions.”
But it also depends on other aggravating factors like interest rates, which are currently at a premium, with the Federal Reserve raising them by 0.75% in late July to help curb record inflation.
“These higher interest rates right now mean bigger monthly payments for new mortgages and that may keep some potential buyers on the sidelines,” Dunn said.
That’s just one example of “a whole bunch of other factors that make this really complicated because there’s so many ancillary things that go into buying a home,” Dunn added. “And unfortunately, as consumers, we have very little control over any of that.”
He also pointed out that, for many student borrowers whose repayments have been suspended for two years due to the pandemic, those dollars they would normally spend on their monthly student loan payment have already been allocated elsewhere. Whether it’s paying off other consumer debt, saving money, or just helping them stay afloat with the higher cost of goods in this time of inflation.
“Those dollars aren’t necessarily available to buy a home now, unless there are other changes in their monthly cash flow,” Dunn said.
Not only that, but it’s currently a seller’s market that doesn’t give buyers huge advantages. “Inventory is low, homes are turning over pretty quickly at bargain prices. Interest rates are going up, so if I’m a seller, I’m fine,” Dunn said. “If I’m a buyer, there’s still high demand.Prices are still high and I don’t have many options to choose from and my supply must be stronger now than it has ever been.
Moreover, he added, it has become even more difficult to obtain a mortgage. “I think things are starting to get tighter from the banks’ perspective and they’re being more careful with who they lend to.”
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When it comes to affordability, more than student loans have an impact, buyers are finding a “constant margin” in their monthly budget, Dunn said. “That means you are not living paycheck to paycheck, recouping debts accumulated during the pandemic through no fault of your own. Once there is consistent wiggle room in monthly cash flow, that would be the assurance that now is the time to start going out and considering a very big expense like a house.
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