Tight Regulatory Environment, Rising Student Debt Hinder First-Time Homebuyers
Americans now hold close to $1.2 trillion in outstanding student loan debt making it the second largest form of consumer debt after home mortgages. What are the implications for housing markets, household formation, and economic mobility for the next generation? Are there creative approaches to reduce the burden?
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By Charlie Dawson
As our housing market continues to heal from the economic crisis of the last several years, current and prospective homeowners are faced with the reality of an increasingly tight regulatory space that is contributing to a constriction of credit in the housing finance area. Rising student debt may impact consumer access to mortgage credit, their ability to save for down payments, and more broadly, attain homeownership. More specifically, a significant aspect of the recently finalized Qualified Mortgage (QM) standard is a requirement that borrower payments on all debts, including those for their mortgage, car and student loan payments, be 43 percent or less of their total income.
Though it may be a reasonable standard in many instances, the continued rise in student debt and the weak labor market may have a long term impact on the ability of many first-time homebuyers to qualify under this standard, particularly lower income consumers. Many of these potential borrowers will find their student loan payments are a significant portion of their total monthly debt burden. As a result, many community banks and lenders will choose not to approve mortgage loans to a large number of these responsible and otherwise qualified borrowers. This scenario impacts not only those hoping to purchase their first home, but also homeowners looking to trade up to larger homes or refinance their existing mortgages.
Today, working families and young professionals face a number of challenges when it comes to purchasing a home. Previous generations followed a familiar path, young professionals and family started off in shared apartments as they built up savings to enable the purchase of their first home. Unfortunately, today’s potential homeowners are finding that student loan obligations can block access to the traditional path to the middle class.
Historically, first-time homebuyers have been the lynchpin of the housing market, comprising roughly 40 percent of homebuyers in the market place. This market share has been in decline at the same time student loan debt has significantly increased. Could the rapid increase in student loan debt be a significant factor in these potential first-time homebuyers’ decisions to delay a home purchase? According to a recent NAR survey, 20 percent of first-time home buyers in today’s market indicated that saving up for a down payment delayed the purchase of their home. Of those, 53 percent stated that student loan debt was a key factor for that delay. In addition to increased debts, prospective first-time homebuyers face a weak job market and income growth potential, which may further delay their entry into the housing market.
We must continue to work with regulators to ensure a sound and viable housing finance regulatory system is in place which allows for all qualified Americans to attain the dream of homeownership, including those with rising student debt.
Charlie Dawson is the senior financial services policy representative for the National Association of REALTORS®
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