America’s young adults could bolster a housing recovery if they weren’t sitting under a growing mountain of student debt, according to a new report from Young Invincibles that studied the effects of student debt on a young borrower’s ability to qualify for and afford a mortgage.
The report, “Denied: The Impact of Student Debt on the Ability to Buy A House,” explained that student debt often raises the average young borrower’s debt-to-income ratios beyond the threshold required to qualify for a Federal Housing Administration mortgage or other private mortgages. So as student debt has ballooned, it has become harder for those with student loans to qualify for a mortgage:
– The average single student debtor is likely ineligible for the typical home mortgage due to their debt-to-income ratio.
– Including a typical mortgage and other consumer debt, the average single student debtor has a debt-to-income ratio of .49, meaning they would pay about half of their monthly income toward student loans and mortgage payments, and would not qualify for an FHA loan or many private mortgages.
– A similar typical single debtor in 2002 would have a debt-to-income ratio of .43 — a 14 percent increase over the last decade.
– For couples looking to buy a house, it is more difficult to qualify for a home mortgage when even one of the buyers has student debt, and even harder if both buyers have student debt.
Private lenders often look beyond the debt-to-income ratio when approving or denying a mortgage, but as the report notes, young college graduates with student debt often lack the sizable down payment or high credit score needed to obtain a mortgage if they already hold too much debt.
The rate of young homeowners was already in decline before the housing crash: from 1980 to 2000, the share of 20-somethings owning homes dropped from 43 percent to 38 percent. And it has fallen off a cliff since then, shrinking by half over the last decade. The entire 30-year drop corresponds with rapidly rising rates of student debt, as tuition prices have soared and students have taken out larger loans to keep up. The total amount of student debt held by Americans will pass $1 trillion sometime in 2012, according to the Federal Reserve.
America’s housing market is limping toward a recovery four years after the market collapsed. Prices rose in all 20 major markets in a popular survey last month. But without young borrowers there to enter and strengthen the market, that recovery is more tenuous than it otherwise could be.