ht John Mauldin
John Burns Real Estate Consulting published a study by Rick Palacios Jr and Ali Wolf that makes some estimates as to how the student loans already made will impact the real estate industry. The study has a great infographic, but I couldn’t get it to copy here in a readable format, so click through to check that out.
The analysis was quite complicated and involved a few assumptions, but we believe it is conservative, primarily because we looked only at those under the age of 40 with student debt.
At a high level, the math is as follows:
- Student debt has ballooned from $241 billion to $1.1 trillion in just 11 years.
- 29 million of the 86 million people aged 20–39 have some student debt.
- Those 29 million individuals translate to 16.8 million households.
- Of the 16.8 million households, 5.9 million (or 35%) pay more than $250 per month in student loans, which inhibits at least $44,000 per year in mortgage capability for each of them.
- About 8% of the 20–39 age cohort usually buys a home each year, which would be 1.35 million transactions per year.
- Using previous academic literature as a benchmark for our own complicated calculation, we then estimated that today’s purchase rate is reduced from the normal 8% depending on the level of student debt—ranging from 6.9% for those paying less than $100 per month in student loans to less than 1% for those paying over $1,300 per month. Other factors contribute to even less entry-level buying today.
This is a government policy issue, because since student loans are not discharged in bankruptcy, they are lower risk for the lender, and thus easy loans for students to take out. 18-22 year old kids are able to run up this massive debt at a time in their lives when many people are not particularly financially literate.