By Nick Timiros
Higher levels of student debt will reduce U.S. home sales by around 8% this year, according to a report released Friday by John Burns Real Estate Consulting, an advisory firm.
The paper examines the impact of student debt on purchase activity for households under age 40. Those households account for around two-thirds of student debt holders. It concludes that sales of new and existing home will total 5.26 million this year, with some 414,000 “lost” households as a result of rising student debt burdens.
Higher debt burdens will defer home purchases for many borrowers while requiring others to buy a less expensive home in order to qualify for a loan or save for a down payment.
The paper estimates that every $250 per month in student loan debt reduces borrowers’ purchasing power by $44,000, and since 2005, some 3.8 million additional households have at least $250 per month in student debt.
Put differently, around 35% of households under age 40 have monthly student debt payments exceeding $250, up from 22% of households in 2005.
The typical first-time buyer can qualify for a $234,080 mortgage without any student debt, but that figure falls as the monthly debt burden rises. (The analysis assumes that the traditional first-time buyer has income of $61,000.) Mortgage lenders generally won’t extend credit to borrowers whose total debt payments exceed 43% of their gross incomes.
The analysis assumes that most borrowers with $750 or more in monthly student debt payments will be priced out of the market unless they’re making much more money than the traditional first-time buyer. For the typical entry-level buyer with $750 in monthly student debt payments, they can qualify for a $103,280 mortgage.
But the analysis finds that many borrowers with modest monthly student debt payments are also lost transactions this year. It concludes that around 57,000 households with student debt payments of less than $100 won’t be buying homes this year, and that around 127,000 borrowers with payments between $100 and $250 are lost.