Feb. 16 (Bloomberg) -- Roshell Schenck has a PhD in pharmacy and earns $125,000 a year, yet can’t qualify for a mortgage for a house for herself and her 9-year-old daughter. The 2008 graduate of Lake Erie College of Osteopathic Medicine, in Erie, Pennsylvania, has more than $110,000 in student debt.
“I’d love to buy and can afford to buy,” said Schenck, 28. Since lenders place closer scrutiny on college loans than in prior years, she says, “it’s almost impossible for me to get a loan. My debt is crushing my chances of purchasing a home.”
As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.
“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”
The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.
Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of FinAid.org, a student loan website. Recent college graduates carry an average debt load of more $25,000 each, which can limit their ability to qualify for mortgages even if they’re fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-olds.
Calling it a “student-loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.
‘Drag on the Economy’
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.
People age 25 to 34 made up 27 percent of all home buyers in 2011, the lowest in the last decade and compared with 33 percent in 2001, according to the National Association of Realtors. At the same time, first-time buyers last year accounted for 37 percent of all purchases, the lowest since 2006, when home prices peaked and the housing boom was showing cracks.
“Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries,” said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, California. “These things pile on each other and tell us it’s not going to help the housing recovery right now.”
Industry analysts including Robert Shiller of Yale University have said housing prices may fall for a sixth year. That in turn may weigh on consumer spending and hobble an economy starting to show some signs of strength.
“The state of the housing sector has been a key impediment to a faster recovery,” Bernanke told the National Association of Homebuilders International Builders’ Show in Orlando, Florida, on Feb. 10. He reiterated comments made at a press conference in Washington on Jan. 25 after the Federal Open Market Committee announced it would hold its benchmark lending rate near zero until at least late 2014, extending its target from mid-2013.
This latest stimulus step was intended “to convey to the market the extent to which there is support on the committee for maintaining rates at a low level for a significant time,” Bernanke said at the press conference.
In September, the Fed announced plans to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to lower borrowing costs even more. The moves followed two rounds of large-scale asset purchases totaling $2.3 trillion that ended last June.
Record-low mortgage rates haven’t revived housing sales enough to spur the economic recovery. The average 30-year fixed rate mortgage was 3.87 percent as of Feb. 9, according to a Freddie Mac index, the lowest in data going back 40 years.
Before the recession, Americans were able to borrow against the ballooning prices of their homes to fund spending on education as well as cars, vacations and startup businesses. As home prices have tumbled, more Americans find themselves “underwater,” or owing more on their mortgage than the value of their home, and with no home equity to borrow against.
“Homeowners who are underwater on their mortgages cannot tap home equity to pay for emergency health expenses or their children’s college educations,” Bernanke said last week.
Palacios, who published research in December on student debt and housing, says first-time buyers are key to a housing recovery because they enable current owners to move into larger, pricier homes. “Move-up buyers need somebody to purchase their homes to move,” he said in a telephone interview. “You need that first leg in the recovery to materialize.”
While the economy emerged from its 18-month slump in June 2009, housing continues to struggle even as home-builder confidence and existing sales picked up in the last quarter of 2011.
Single-family starts fell last year while multifamily housing construction surged as more Americans became renters. That should continue to boost apartment real estate investment trusts, said Palacios. Equity Residential is among them, up more than 240 percent from its March 2009 low. AvalonBay Communities Inc. is up 230 percent.
New home sales and starts of single-family homes in 2011 were the lowest since 1963. Existing home sales for all of 2011 were up only 3.6 percent from their 2008 recession-trough, which was the lowest for a full year since 1995. Sales of distressed homes, including foreclosures, accounted for about a third of existing home sales last year, according to the realtors group.
Not a Priority
Prices are down about 33 percent from their 2006 peak, according to S&P-Case Shiller data, and most experts expect further declines. Patrick Newport, who covers housing for IHS Global Insight in Lexington, Massachusetts, sees prices falling another 5 to 10 percent nationwide.
People age 25 to 34 accounted for 52 percent of first-time buyers last year, near the average since 2005, according to the Realtors group. Still, almost 6 million Americans in that group were living with their parents in 2011, up from 4.7 million when the recession began in 2007, according to Census data.
Buying a home is not high on Marie Casteel’s priority list. She graduated from the University of Cincinnati in May with a law degree and $120,000 in debt.
She’s deferred most student debt payments while she begins a job as a family attorney that she says should pay about $45,000 a year. Once her full re-payment schedule kicks in early next year, she expects to be paying about $1,500 a month.
“I wouldn’t be looking at jumping into another $100,000 of debt to own a home,” said the 31-year-old single mother. “I don’t think jumping into home ownership would be financially reasonable.”
Still, once the youthful Americans coping with debt and high unemployment finally emerge from under those loads, that group should take the lead in a housing recovery, said Palacios.
“Once you start seeing that segment of the population start jumping into the home-purchase choice, it’ll be a good indication of normality returning to the market,” he said.
For her part, Schenck, the pharmacy PhD who is now living in Waterford, Pennsylvania, and working as a pharmacy manager for a grocery chain, still wants to buy at some point. She’s trying to build enough savings for a larger down payment, to increase her chances of getting a mortgage.
“I haven’t given up hope of one day owning my own home,” said. Still, “the dream feels like it’s farther out of reach than I ever thought it would be.”
--Editors: Gail DeGeorge, Rob Urban, Pierre Paulden
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