Student Loans Crowding Out Home Purchases

Student and auto loans have historically dominated non-mortgage, non-revolving credit, as seen in the Federal Reserve’s G.19 Consumer Credit report. As of the third quarter of 2018, student loan debt totaled $1.6 trillion.  As student-loan debt has historically made up the majority of non-mortgage, non-revolving credit, homeownership is the opportunity cost for its accumulation. In January 2019, as part of its new Consumer & Community Context series, the Federal Reserve presented a study of the effect of rising student debt on the homeownership rate. The authors measure homeownership by ever having a mortgage loan by a given age.

The key finding of the study was that, of the 9-percentage point drop in the homeownership rate of 24 to 32 year olds between 2005 and 2014, 2 percentage points could fully be attributed to the accumulation of student loan debt.

The figure above shows the study’s main finding, using data of the same cohort (24 to 32 year olds) from two survey years. In the study, the authors also point to the 2008 financial crisis as a confounding factor that would overstate the effect of student debt on homeownership. While student debt has increased, credit lending standards have become more stringent after the Great Recession., thus providing another impact on homeownership. To focus on the student loan impact, the authors limited their sample selection to 24 – 32 year olds who made home buying decisions prior to 2008.

Data from the Federal Reserve Bank of New York’s Consumer Credit Panel / Equifax also show student loan balances by age group since 2003, as seen below:

In 2005, the first year examined by the Consumer & Community Context study, the student loan balance of the under 30 and 30 – 39 year-old cohorts stood at $290.1 billion. By 2014, the balance had increased to $754 billion for these cohorts. Equally pertinent to consumer credit insofar as student debt is concerned are the rates among different borrowers’ ages at which loans are repaid and defaulted upon and whether the student graduated.

The data suggest that graduation, be it from an associate’s or bachelor’s or higher program, reduces default. On the other hand, default, across all categories, as suggested by the Federal Reserve Bank of New York’s Consumer Credit Panel, increases with the age of the borrower.

This post brought to you by NAHB Eye on Housing.