Student Debt May Hurt Housing Sector

College Debt Housing Market

College Debt Housing Market

The amount of debt that college graduates are lumped with has been a growing concern in recent years. Many students come out of college with between $30’000-$100’000 in debt, and are looking to secure employment quickly to pay those debts down. One unexpected outcome of this massive amount of college debt being held by some graduates is that it impedes the growth in the housing market.

As the students reach an age that a person would normally be looking at purchasing a property, they still have many thousands of dollars worth of college debt they need to pay off. That means some college graduates will be delaying their purchase or in some cases, completely giving up on purchasing a property.

This problem will be further compounded by the global financial crisis because we have a generation of college graduates who have completed college and struggled to find employment in a depressed jobs market.

The housing market has been bouncing back since the global financial crisis, but this has been fueled mostly by cashed up property investors and not by first home buyers. As property prices climb that demand is expected to drop and if the property market is going to continue to grow at a sustainable rate, first home buyers will have to start buying property again. Applications for mortgages are already slipping compared to a few months ago.

First home buyers only accounted for 30% of property purchases in the last year, which is still below the historic norm. Growing rates of student debt may be the issue preventing many of these buyers from entering the market.

Student debt is now more than $1 trillion dollars and going to college is becoming increasingly expensive. Compounding this problem is that wages for recent graduates have declined, largely due to the global financial crisis also. So even if a recent college graduate can find a job in the current market, they will often be getting paid less than a graduate would have 10 years, and they have more debt than a graduate would have 10 years ago.

The reality is the entire economy needs a growing housing market to help drive manufacturing, jobs and consumption. If the demographic that were the primary source of first home buyers can no longer afford to buy, it will hurt the entire economy.

Student debt isn’t very productive debt as well. The money goes into the pockets of well paid lecturers and universities. That is different from debt which is accrued to actually build things like houses, which flows through the economy quickly.

To further compound the problem, there are new federal rules that make sure financial institutions only give out loans to clients on a more solid financial foundation.

Federal laws began last month that only grant lending institutions legal protections if they only lend to clients whose total monthly debt does not exceed 43% of their gross income. That makes things very difficult for college graduates who may be paying back $500 in student loans, a car loan and utilities bills.

These limits can even affect college graduates who have managed to land high paying jobs like doctors or lawyers, simply because their college debt so so large and the re-payments excessive.

The college debt problem also means many college graduates don’t have a great deal of cash in their financial reserves so are exposed to any future economic downturns. If they lose their job, for example, they could be in real trouble very quickly.

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