WASHINGTON - The growing student-loan burden carried by millions of Americans threatens to undermine the housing recovery’s momentum by discouraging, or even blocking, a generation of potential buyers from purchasing first homes.
Recent improvements in the housing market have been fueled largely by investors who snapped up homes in the past few years. But that demand is waning as prices climb and mortgage rates rise. An analysis by the Mortgage Bankers Association found that loan applications for home purchases have slipped nearly 20 percent in the past four months compared with the same period a year earlier.
First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student-loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped.
The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.
Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses.
But the rules could also make it difficult for some buyers with student loans to obtain a mortgage. Take someone seeking a $626,000 loan with a 4.5 percent interest rate to buy an $800,000 house.
If that person earned $125,000 a year and had a $450-a-month car payment, he would fall within the limit, said Phil Denfeld, a vice president at First Heritage Mortgage in Fairfax, Va. But add a $100 student-loan payment to the mix, and the debt-to-income ratio could climb above the new restriction.
The Consumer Financial Protection Bureau sounded the alarm about this trend in 2012 and did so again in November. Speaking before the Federal Reserve Bank of St. Louis, the bureau’s Rohit Chopra said that rising student debt “may prove to be one of the more painful aftershocks of the Great Recession,” with implications for the housing market.
And, the Federal Housing Administration, a popular source of low-down-payment loans for first-time buyers, may make it even tougher. Currently, the agency allows the mortgage lenders it does business with to ignore student debt that’s deferred for a year or more when assessing a borrower’s eligibility for a loan.
Chris Herbert, research director at Harvard University’s Joint Center for Housing Studies, agrees with those who say the swelling student debt is a concern. But he also says it may not hobble young adults’ access to the housing market as much as some fear.
In his own analysis, Herbert found that the median amount borrowed for school by people in their 20s “barely budged” from 2004 to 2010, hovering around $11,000 when adjusted for inflation.
Business, Pages 70 on 02/23/2014