25 June 2019

Unraveling the Effects of Student Loan Debt on the Economy

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Are Student Loans Really Killing the Housing Market?– Derek Thompson, The Atlantic

 “Here's a simple story about student debt and the U.S. economy that you might already know.

Standing tall at $1.2 trillion, the student loan monster has tripled in size in the last decade for two reasons—more students and more debt. Seventy percent more students are getting loans, and the typical borrower is taking on about twice as much. All this debt from school might pay off with higher wages for graduates, but today this wall of debt is preventing students from getting on with their lives. Since student debt is concentrated among young adults who are likely first-time home-buyers, it's particularly devastating to the housing market.

This is a story I believed, because I read it over and over—from the Wall Street Journal, Bloomberg Businessweek, the Brookings Institution, Realtor magazine, and the New York Federal Reserve. I also believed it because it made a lot of sense. The housing market needs new buyers, and those new buyers need new debt. But if they're wracked with student debt, already, they won't buy homes, and the real estate business is toast.

It's a plausible narrative backed up by one key factoid I'd seen everywhere: That first-time buyers used to account for 40 percent of the housing market, but now they make up just 30 percent.

But this isn't a fact-fact, according to the Atlanta Fed. It's a Frankenstein-fact, built with two distinct methodologies mashed together. The 30 percent number comes from the Realtors Confidence Index, a newish survey of realtors, and the 40 percent number comes from the Profile of Home Buyers and Sellers, a more established survey of households. According to the broader survey, there has been no major fall-off in first-time buyers as a share of the market. (That spike in 2009 and 2010 coincides with the introduction of a home-buying tax credit from the federal government.)

But ... wait. This simply can't be right.

First-time home-buyers still skew young—the median age is 31, approximately what it's been for a decade—and young people clearly aren't buying as many homes as they used to.

We have every reason to believe that the decline in homeownership is related to the incredible rise of student loans among young and middle-aged households. Student debt can prevent some young borrowers from taking on debt and student debtors tend to have worse credit scores, as a new working paper from the Brookings Institution argues.

This whole thing seems like a paradox: Student debt is destroying demand among first-time buyers, but it's not affecting their share of the market. What the what?

Here's one explanation from an economist behind the numbers. “The share of first-time buyers appears to be only modestly below normal," said Lawrence Yun, NAR chief economist. "But we have to keep in mind that investors have been more active in recent years, and they’re not included in these results."

Who are these investors not included in the household realtor numbers?

They're big companies like Blackstone and American Homes 4 Rent who are going out and paying all-cash for thousands of cheap distressed properties. Thanks to these behemoths gobbling up homes without any use for mortgages, all-cash home purchases have grown to 50 percent of the market, the highest on record. Corporations are acting like people, buying up enough existing homes and contributing to rising prices in metros across the country. Meanwhile, the share of 25-34-year olds with homes has fallen by 15 percent since 2005.

This also suggests that student loans are depressing demand for homes, but only slightly more than the overall market for homes is already depressed for various reasons, like under-employment, tighter lending standards, and a general shift away from ownership. Consider…the share of student-debtors with mortgages. It's fallen by five percentage points since 2008. But look at the non-student-debtors: Their appetite for mortgages is just as low.

In short, there are two housing markets in America. It's not one for student debtors and one for non-student-debtors. Rather, it's one market for healthy corporations, who are buying at a historic rate; and one market for families, which is still quite sick—except for richer folks who are more likely to qualify for loans or have the cash to pay in full.”

Click here for the full article.

How Student Debt May Be Stunting the Economy – Neil Irwin, New York Times

“Is student loan debt holding back the economy? There’s some new evidence that the answer may indeed be a big ‘yes.’

In the past, it was easy to ignore the role that student borrowing might play in the overall economy. A decade ago, there was only about $300 billion in such loans outstanding, and even now the $1.1 trillion in student loan debt is dwarfed by mortgage debt. But people who borrow money to pay for their education can’t simply walk away without paying, unlike with mortgages, car loans or credit cards; there is no equivalent of foreclosure, and student loan debts aren’t cleared by bankruptcy.

That may all be great from a lender’s point of view. But there’s a growing body of evidence that rising levels of student loan debt are restraining the ability of young adults to enter the ‘grown-up’ economy — to buy a car and to buy a home and start filling it with big stuff.

While the overall level of student debt may not measure up to that of mortgages — $8.2 trillion — it is highly concentrated among a small slice of people — those in their 20s and 30s — who are the engines of a great deal of economic activity. One of the crucial reasons the housing market has not expanded enough to support robust economic growth is that young adults are not setting up their own households at anywhere near the historical norm.

Might higher student loan debt burdens be an important reason? After all, a person with monthly student loan payments of $300 — about what you would expect for the average new loan balance of $29,400 at government-subsidized interest rates — is going to be more inclined to bunk with roommates or Mom and Dad.

One more solid piece of evidence for this theory is contained in the latest report on household debt issued by the New York Fed, and an accompanying post on its Liberty Street Economics blog.

In the not-too-distant past — until just before the 2008 financial crisis, to be precise — around 30 percent of 27- to 30-year-olds had debt issued backed by a home. Even more interesting, 33 percent of the people in that age bracket also had student loan debt.

But since then, the proportion of 27- to 30-year-olds with mortgages has plummeted to around 22 percent, according to the New York Fed data, which is also consistent with the trends in homeownership identified by the Census Bureau and other data sources.

Here’s what’s most interesting, though. The proportion of adults in that age bracket who have a mortgage has fallen most sharply among those who have student loans as well. Unlike in the past, when they tended to be more likely to have mortgages (perhaps because of better credit, or more inclination to take out loans), they now have mortgages at a lower rate than those with no student debt.

A similar story holds with auto loans. In 2008, 37.6 percent of 25-year-olds with student loan also had an auto loan, but by last year that had fallen to 31.4 percent.

And there could be more to the weak housing market than just student debt overhang. The researchers, Meta Brown, Sydnee Caldwell and Sarah Sutherland, also mention the possibilities of limited access to credit and a possible shift in young adults’ preferences away from home buying.

But the evidence certainly fits an explanation of higher student debt levels as a significant factor standing in the way of a stronger recovery.”

Click here for the full article.

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