According to Mic.com, the students graduated in 2015 have the most student loan debt in history! This is a serious problem for many obvious reasons. But let’s talk how this affects real estate.
The first is the down payment. For most conventional loans, you are going to have to pay a down payment upfront. That means for a purchase of $150,000, the buyer would have to put down $30,000 if you were to put 20% down. With the average student loan debt being $35,000 for a bachelor’s degree, the task for saving becomes a difficult one. The money owed could have gone towards the down payment and then some because even if the student loan is for $35,000, there is still interest accruing. And in the city of Los Angeles, finding even a 2 bedroom condo for $150,000 is close to impossible.
The second is qualifying for the loan. On the most basic level, lenders not only look at credit score and how much you have in the bank, but they look at the debt to income ratio. In other words, they take all of your debt on a monthly basis and compare it to your income on a monthly basis to see if you can afford the loan based on their standards. The more debt you have, the lower the amount of a home loan you would qualify for. Especially in areas like Los Angeles where prices are higher than other parts of the nation, it is hard enough finding something in your price range, let alone qualifying for it.
The third is a physiological one. Due to the massive amount of debt that graduates have accumulated, first time home buyers are afraid to take on more debt, even if it is for an investment such as a home. Therefore they are waiting to pay off their student loans, and even then may not make the next step in buying due to the perceived risk of being in debt.
So what does this mean for the market? Well, if first time home buyers are taking longer to buy, then that means they are either staying home with the parents or renting. And with rents going up in the Los Angeles area, that means that it is going to make it tricky for first time home buyers to save up to buy their first place. And because they are constantly saving up as the market prices go up, then, unless something changes either in the market or the buyer, graduates will be constantly chasing the housing market.
And the last is on the financial strain on the parents. As soon as their child moves out, the parents may be hoping to retire, bring down their expenses (such as selling and moving into a smaller place), and start focusing on their own financial needs. However with graduates moving back home, parents have to reorganize and continue to pay expenses they otherwise would not have had to do.
The solution? That is a difficult question because it would require either tuition at the universities to either go down or have more of it subsidized by the government. Either way, there is a lot of work to do or it can result in a growing problem if not addressed soon.
Image courtesy of ddpavumba at FreeDigitalPhotos.net
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[…] in total U.S. student loan debt. As you may have read in my article back in October of 2015, Student Debt is Hindering Home Buyers; it can have effects on graduates wanting to […]