By John Carney And Justin Lahart
President Barack Obama’s executive order expanding student-debt relief is the latest sign policy makers recognize the serious economic burdens young adults face. But the modest change is unlikely to move the needle in ways that matter to investors.
The financial crisis exacted a heavy toll on the generation of Americans now entering their 30s. Facing difficult job prospects, experiencing little to no income growth and burdened with a historically unprecedented level of student loans, their finances are in a far more precarious state than those of prior generations. That has cut into their ability to buy a first home, and has been a major reason the housing recovery continues to disappoint.
Nor is the situation likely to improve. The possible results: Banks will see tepid demand for mortgages. Home sales and single-family home construction will be stuck below historic norms. Demand for goods like furniture and appliances, as well as services such as home repairs, will grow only slowly. And housing will continue to add less to the economy than in the past.
Start with the balance sheet of people in their 20s. Thanks to the expansion of the number of students attending college, and the rising cost of higher education, the share of 25-year-old Americans with student debt has grown to more than 44.7% last year from 25% in 2003, according to the Federal Reserve Bank of New York. The average amount of that debt expanded by 69.2% over that period.
At the same time, the drag from that debt on the ability of younger Americans to receive a home loan has been growing. Before the financial crisis, the average credit score for people in their 20s and early 30s with student loans exceeded that of someone the same age without college debt.
That changed in 2009, when student-borrower credit scores fell below those of nonborrowers. And, since then, the gap has been growing ever-wider: the average 25-year-old with student debt last year had an Equifax risk score of 626, compared with an average of 642 for one without college loans.
Mortgage lending has all but dried up for borrowers with credit scores that low. A decade ago—before the go-go years of the housing bubble—people with FICO scores lower than 640 made up around 22.5% of mortgage borrowers, according to CoreLogic. Today, that group receives just 2.47% of mortgages.
Taken together, these numbers mean it is far more difficult for Americans to get a mortgage and make their initial home purchases. Ten years ago, 32% of those aged 27 to 30 years old had outstanding home loans. By last year, that number had contracted to 21%. Homeownership rates for 25-to-34-year-olds have fallen from 49% in 2003 to 41.6% last year, according to the Commerce Department, far steeper than the drop for older groups of Americans.
What’s more, the median income for Americans aged 25 to 34 has advanced more slowly than incomes overall, and has fallen over the past decade, adjusting for inflation. As a result, the recent rise in home prices has made homes less affordable for them relative to other Americans, despite mortgage rates that are still low by historical standards.
Their housing travails could have wider knock-on effects. Since the bottom rung of the housing-market ladder is in bad repair, demand for homes—as well as the mortgages that finance them and the furniture and appliances that fill them—may remain at depressed levels for some time. And current homeowners may find it more difficult to find buyers in the future.
Student-debt relief might improve the prospects for young people hoping to take the step up into their first home. But it is hard to see it improving them all that much. Better help would come from a dramatic recovery in employment and incomes that would allow them to put their costly educations to work.
Yet even if the job market ratcheted up to that level, it is a generation that may be perennially a step behind, taking on homeownership and other traditional trappings of adulthood far later than in better times.