Sally did everything right. She was accepted into her first choice college and received a first rate education to pursue her dream career. She filled out the student loan applications like everyone told her to; after all, she couldn’t afford the $90,000 degree without it. When she graduated, she started out entry level in her chosen field, making near minimum wage which just covered her rent (with three roommates) and living expenses. She deferred payment on her student loans for two years but after watching the interest inflate her debt up to $170,000 she had to move back in with her parents to concentrate on paying it off before it got any worse.
Then her boyfriend proposed to her. He talked about wanting to buy a house and have a family, the whole American dream, but though he knew she lived with her parents in order to pay off her student loans, he didn’t know the extent of her situation. She knew her debt would make buying a house impossible, so she called her loan provider to see if she could get her interest reduced. They said no, she already had .25 for direct deposit taken. Her interest was 8%. She could barely make the minimum required monthly payment to take care of the interest let alone get down to the principal. Worst of all, when she told her fiancé this, he withdrew his offer; he didn’t want her bad debt ruining his good credit.
According the National Association of Consumer Bankruptcy Attorneys, seven out of ten college seniors who graduated in 2012 had student loan debt, with an average of $29,400 per borrower. Currently 29 million of 86 million Americans aged 20 – 39 have some level of student debt, which translates into 16.8 million households. Because federal law treats student debt as non-dischargeable in bankruptcy proceedings, borrowers can be burdened with this debt for a lifetime even if circumstances make it unlikely that the borrower will ever be able to repay. Asking nicely won’t make it go away.
How Does This Affect Real Estate Investors?
In a 2014 blog post, Rick Palcios Jr. and Ali Wolf of John Burns Real Estate Consulting, LLC, estimated that 414,000 real estate transactions would be lost in 2014 due to student debt. At a typical sales price of $200,000 for an entry level home, they calculated that out to $83 billion in lost sales volume or 8% of the total marketplace demand. (8% of 20 -29 year olds usually buy a home each year, which would be equal to 1.35 million transactions a year.)
They calculated that 5.9 million households under the age of 40 pay over $250 a month in student loans as compared to 2.2 million in 2005. As a percentage, that is from 22% in 2005 to 35% in 2014. In that same eleven year timeframe, student debt increased from 241 billion to between $1.1 and $1.2 trillion dollars, which is even greater than current credit card debt.
That basically means that those that sought shelter in the halls of academia during the economic downturn, often have no way to pay it back. Even with a college education and a decent job, some of these college graduates live with as much expendable income as those under the poverty line since all their wages go to living expenses and to pay down their student debt.
We know that home builders are selling fewer homes. As investors, we want to know how long this will go on and how this will impact the demand for alternate living arrangements.
Bear in Mind
The percentage of students who cannot pay their student loans have a huge impact on American society and economic growth:
- · They can’t afford to buy a car, and their credit may be too bad to finance one.
- · They are hesitant to marry, because they don’t want to assume liability for unpaid student loan debt or they don’t want their future spouse and household to be burdened by the debt.
- · They are hesitant to have children, because they can’t afford to raise them or put them through school. (The last thing they want is to have their children pay their student loan debt as well.)
- · They are putting off medical care because they don’t have the money to pay the deductibles or even afford insurance premiums.
- · They can’t buy a house, not only is their credit bad but they cannot afford the house payments, not to mention the down payment required to close.
Where Does This Take Us?
We have already seen a boom in apartment construction. It is estimated that this boom will continue through 2015 as young people continue to move in together to save money. Many of those tenants don’t have a car and want to live in the downtown of a large city where they can walk or bike everywhere they need to go.
At some point, high downtown rents will force those with student loan debt out of the city center, because the rents needed to fund new construction will not be affordable. The Y generation will then need a car, a small used car with high gas mileage, or find a place with easy access to public transportation.
As they move to potentially lower rent apartments in the suburbs, their peers without student loan debt will be buying homes and home builders will see some increased demand.
Another option for the future would be to encourage the federal government and Sallie Mae, (one of the major holders of student loan debt,) to refinance loans at lower interest rates and to forgive late penalties and interest rate hikes since, as they say, you can’t squeeze water from a stone.
Credit unions are showing some interest in helping the Y generation recapitalize their debt, but they are very cautious, and should be given that many of these student loans are delinquent and their holders have low credit scores.
If the Y generation can refinance this debt, then the opportunity exists that within five to seven years a new cohort of buyers might end up in the housing marketplace. In the meantime, the members of this debt-ridden generation are renting apartments and houses together, fueling the apartment building boom.
Clifford A. Hockley is President of Bluestone & Hockley Real Estate Services, greater Portland’s full service real estate brokerage and property management company.. He is a Certified Property Manager and has achieved his Certified Commercial Investment Member designation (CCIM). Bluestone & Hockley Real Estate Services is an Accredited Management Organization (AMO) by the Institute of Real Estate Management (IREM).