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MNI ANALYSIS: Student Loans Threaten US Housing Market

By Holly Stokes
     WASHINGTON (MNI) - The growing threat of mortgages outpacing savings, as
discussed in last week's MNI Analysis: US Housing Prices Outpace Savings, is
compounded by increasing levels of other sources of debt that pose a risk not
only to future home sales, but potential delinquency. 
     Consumer credit has been rising month/month for 27 months in a row,
signaling the continued willingness of consumers to keep piling on new debts.
Mortgages are the largest contributor to overall consumer debt, as the level
continues to climb post-housing crisis. In fact, fourth quarter 2017 outstanding
mortgages, at $14,903 billion, surpassed peak housing bubble levels. Mortgages
also dwarf other consumer debts, as fourth quarter 2017 mortgages are 314%
larger than consumer's outstanding auto loans, revolving credit, and student
loans combined.
     However, a closer look at outstanding consumer debt shows that student
loans are becoming a greater threat - as they rise at a faster rate than other
forms of credit and have surpassed both revolving debt and auto loans since the
third quarter of 2010.
     While rising student loan debt is partially due to increased borrowers as
more people pursue higher education, it is also expanding because individual
consumers are choosing to take on larger loans.
     A study by Experian entitled the State of Student Loan Debt published
August 2017 showed that the average student loan borrower owed $34,144, a 62%
increase from their measure 10 years ago. Supporting industry data that
individual borrowing has been on the rise, a study by the Cleveland Fed found
that in 2015 the average student loan payment a month, for those between 20 - 30
years old, was $351, jumping up from the $227 average in 2005.
     One of the reasons that consumers are taking out larger student loans is
because of the rate at which higher education costs are rising. Looking at the
year/year change in CPI college tuition, it becomes apparent that until this
past year, education was rising at a significantly faster rate than overall
inflation. This is largely due to education prices being seemingly immune to
economic cycles, rising upwards of 5.0% year/year in the midst of 2009 economic
     Also, while the rate of growth in college tuition costs is slowing,
education costs continue to grow at an average rate of 2.0% year/year in the
last 12 months - furthering the likelihood of growing individual borrowing.
     Studies conducted by the National Association of Realtors found that the
growing burden of student loans are having a direct impact on home sales, as non
homeowners put off buying their first home as they struggle to pay off student
debts. The NAR's Student Loan Debt and Housing Report 2017 found that 83% of
millennial non homeowners believe student debt has delayed homeownership.
Further, the NAR reports that the delay in buying as borrowers struggle to save
for a downpayment is seven years. 
     The growing cost of college is not just a burden to millennials looking to
buy their first home, but also to older generations that shoulder the cost for
children and grandchildren - preventing existing homeowners from moving, and
furthering the inventory shortage. 
     In fact, the State of Student Loan Debt report suggests that Generation X
has taken on more of the debt burden than millennials, as Gen Xers have roughly
$5,500 more in student debt than the national average - putting them at $39,802
in student loans. This has prevented many current homeowners from upgrading to
newer homes, with a 2016 NAR survey reporting that 31% of current homeowners
have delayed moving due to student loans. 
     As student debts continue to grow, demand for homes from both
would-be-buyers and current homeowners is dampened. This could result in both a
shortfall in future sales and increased risky borrowing to finance homes.
Further, rising inflation poses a new risk to the housing market.
     As markets continue to expect rising inflation and future Fed hikes, home
buyers shopping for a fixed rate mortgage are facing higher rates. This, in
turn, further dampens demand for homes and increases mortgage burdens on buyers.
     The rising fed funds rate also has a direct impact on student loan
borrowers with a variable rate. As the fed funds rate rises, the prime rate
moves up in tandem, and existing borrowers with adjustable rates find themselves
owing more than they may have budgeted for.  Not only should this delay home
buying, but it poses a threat that existing homeowners will find themselves
strapped to higher payments that compete with mortgage obligations and that
student loan delinquency, currently at 10.7% according to the New York Fed, will
     And as consumers continue to borrow to finance higher education, while Fed
hikes continue to be penciled in, there is a growing threat to both the housing
and debt markets. 
--MNI Washington Bureau; +1 202-371-2121; email:

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