Student Debt: A Drag on U.S. Housing and the Economy


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New evidence released suggest that the increases in college costs which have driven the accumulation of student debt has ripple effects that are hurting the U.S housing market and could have long term effects that harm the economy as whole.

Examining the changes in student debt accumulation and housing ownership in the Commonwealth of Virginia.

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Student Debt: A Drag on U.S. Housing and the Economy

  1. 1. 2014 Robert M. Davis, MPA The Guy In Glasses Student Debt: A Drag on U.S. Housing and the Economy
  2. 2. Student Debt: A Drag on U.S. Housing and the Economy By Robert M. Davis, MPA $1.1 Trillion; trillion with a “T”, that is now the total of outstanding student loan debt in the United States. Student loan debt is now second largest kind of consumer debt in the U.S. Outstanding student loan debt accounts for roughly 6%1 of the U.S. gross domestic product (GDP) outpacing credit card debt and second only to mortgage debt2 . In Virginia, the average debt of a bachelor’s degree recipient leaves college with $25,017; this debt burden has increased 25% ($5,000 more) from 2007 to 20123 . The average level of debt correlates with an increasing trend in the costs of college attendance that has grown 22% or $4,929 over the same period4 . Compounding the growth in debt is the % of those loans that have fallen into default (unable to make monthly payment) that has reached 11.5% in year 20135 . 7 in 10 college graduates now finish college with debt and 1 in 5 households carry some form of student debt; this is double what it was 20 years ago6 . Figure 1: The Institute for College Access & Success, College InSight, New research findings released show that student debt may be having a significant impact on the overall U.S. housing market that could translate into long term economic effects for the U.S. economy as a 1 The United States' nominal GDP was estimated to be $17.4 trillion in January 2014 $1.1 trillion of $17.4 trillion is 6.3% 2 3 See attached excel file for figures from The Institute for College Access & Success, College InSight, These figures are all Virginia higher education institutions that are classified as 4 year or above (Bachelors and above granting). 4 See footnote 3 5 buyers/ 6
  3. 3. whole7 . The % of first time homebuyers has decreased -3% from year 2012-2013 to 28% of existing home sales89 . Just 13 years ago, first time home buyers aged 25-34 made up 33% of existing home sales10 . First time home buyers are essential to a housing recovery since their purchases have a ripple effect that resonate through the housing market; current homeowners are able to move into larger/pricier homes because first time homebuyers are the one’s buying the existing properties from the current homeowners that want to move up11 . Increasing student debt limits recent graduates from being able to afford enough for a down payment for a home or even qualify for a mortgage due to their high debt to income ratio; student debt leverages an individual, they essentially come out of school with a lot of debt and very little credit. This high debt ratio makes an applicant look “risky” to a bank and subsequently denies the individual a mortgage12 . This issue is further compounded as home sale prices begin to increase and interests rates along with them. Following the recession, interest’s rates were at an all time low and home sales prices dropped significantly. However, as the economy improved, so too has home sales prices and interest’s rates which are now pricing out leveraged first time buyers from the market13 . In Virginia, the number of housing units classified as owner occupied units has decreased by -1% while renter occupied housing has increased by +1%. The % of total owner occupied housing units with a mortgage has decreased by -4%. The % of individuals renting versus owning a home has increased while the % share of homes owned with a mortgage have decreased14 . Figure 2: 2007 & 2012 U.S. Census Bureau American Community Survey 1-Year Estimates 7 See footnote 5 8 9 push-prices 10 11 See footnote 10 12 13 14 See attached excel sheet with data values from American Community Survey 1-Year Estimates years 2007&2012 Virginia Hiousing Characteristics 2007&2012 U.S. Census American Community Survey Year # of Owner Occupied Housing # of Renter Occupied Housing % of Owner Occupied Housing % of Renter Occupied Housing 2007 2,932,234 894,136 77% 23% 2012 3,038,967 969,867 76% 24% Change 106,733 75,731 -1% 1% Virginia Hiousing Characteristics 2007&2012 U.S. Census American Community Survey Year # of Housing Units with a Mortgage % of Total Owner Occupied Housing Units with a Mortgage # of Owner Occupied Housing Units Moved into Year 2005 and later (2005-2007)* Moved into Yeay 2010 and later (2010-2012) % of Total Owner Occupied Housing Units with a Mortgage Moved into Year 2005 and later (2005-2007) 2007 1,490,034 51% 882,788 30% 2012 1,436,421 47% 827,464 27% Change (53,613) -4% (55,324) -3%
  4. 4. Recent college graduates are spending roughly $1,000 more per year on their college loans than their counterparts who graduated in 2010 alone. New college graduates are paying more toward their debt as they have had to borrow more while wages for these graduates have been relatively flat for the past 10 years15 . High debt and reduced wage earnings in turn further exacerbate the debt to credit ratio. The more earnings are dedicated to paying off existing debt, the less earnings are available to pay a mortgage, buy a car or even purchase regular goods and services ; this creates the second effect which is known as a slack in demand16 . Irving Fisher in 1933 wrote about how when an economy has too much debt it therefore becomes more susceptible to events like recessions; consumers reduce spending driving down demand and further exacerbates the effects of the event (Individuals spend their money paying of their debt and not saving for a house)17 . As new graduates take on more student debt to afford the increasing costs of college, they are beholden then to the income earnings they are able to generate when entering the job market. One of the effects of the recession however is many new graduates entering positions in which the wage earnings may be insufficient to pay off their debt burden and in tandem save for a house or make other purchases which fuels demand and the health of the economy overall. Household debt as a % of GDP has increased over the last 30 years; as debt increases, consumers have less to spend. As consumers have less to spend there is a decrease in demand. As demand decreases, so too does supply; this drives reductions in the labor force and the income earnings that go with it1819 . Figure 3: “Consumer Spending and the economy” (Stewart, Hale) and-the-economy/ 15 16 17 18 See footnote 16 19 buyers/
  5. 5. Additional Charts Figure 4: “Quarterly report on household debt and credit” Federal Reserve Bank of New York Figure 5: Average debt of Virginia college graduates; years 2007-2012. The Institute for College Access & Success, College InSight,
  6. 6. Figure 6: Total costs of attendance of Virginia 4 year or greater institutions; years 2007-2012.The Institute for College Access & Success, College InSight, Figure 7: % of Virginia graduates graduating with debt; years 2007-2012. The Institute for College Access & Success, College InSight, $22,067 $23,349 $24,763 $26,996 $- $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 2007-08 2008-09 2009-10 2011-12 Virginia - 4-year or above Virginia - 4-year or above Virginia - 4-year or above Virginia - 4-year or above Total Cost of Attendance (on-campus) Total cost of attendance (on-campus) 0% 20% 40% 60% 80% 100% 2007-08 2008-09 2009-10 2011-12Virginia - 4-year or above Virginia - 4-year or above Virginia - 4-year or above Virginia - 4-year or above 58% 57% 58% 60% 42% 43% 42% 40% % Graduating With Debt Percent of graduates with debt Percent of graduates without debt
  7. 7. References Bartash, J. (2014, February 18). Rising student-loan debt is stopping first-timers from buying homes. Retrieved March 2014, from time-home-buyers/ Bureau of Economic Analysis . (2014, January 30). Gross domestic product: fourth quarter and annual 2013 (advance estimate). Retrieved March 2014, from Davidson, K. (2014, February 18). Why student loans affect the housing market. Retrieved February 2014, from affect-housing-market Federal reserve Bank of New York. (2014, February). Quarterly report on household debt and credit. Retrieved March 2014, from New York Q4/HHDC_2013Q4.pdf Lane, S. (2013, September 19). First-time homebuyers fighting for a spot in an all-cash world. Retrieved March 2014, from for-a-spot-in-an-all-cash-world/ National Association of Realtors. (2013, September 19). August existing-home sales rise, limited inventory continues to push prices. Retrieved March 2014, from continues-to-push-prices Olick, D. (2013, November 5). Tight credit squeezing first=time homebuyers out of market. Retrieved March 2014, from squeezing-first-time-homebuyers-out-market-f8C11533219 Schmit, J. (2013, June 29). First-time buyers losing out as home sales rise. Retrieved March 2014, from USA Today: buyers/2472925/ Schueckler, L. (2013, December 17). Understanding what debt-to-income ratio means. Retrieved March 2014, from means Stewart, H. (2010, September 19). Consumer spending and the economy. Retrieved March 2014, from FiveThirtyEight Economics: The Institute for College Access & Success, College InSight. (2014, March 29). Student debt data.
  8. 8. U.S. Census Bureau. (2014, March 29). 2007 & 2012 Ammerican Community Survey 1-Year Housing Characteristics Virginia. Willis, B. (2012, February 23). Student debt is stifling home sales. Retrieved March 2014, from Bloomberg Businessweek market & finance: 23/student-debt-is-stifling-home-sales