As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers. 9 percent of 29 to 34-year-olds got a first-time mortgage between 2009 and 2011; compared with 17 percent 10 years earlier. These data suggest a large decline in mortgage borrowing by potential first-time homebuyers. This is due to not only weaker housing demand, but also the effect of tighter credit conditions.
Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are students loans beginning to have the same effect. This will be a drag on the economy for the foreseeable future. Students coming out of college are burdened with more debt than traditionally they have been. And, they are also coming into an economy that is underperforming previous recoveries.
First-time buyers are key to a housing recovery because they enable current owners to move into larger, pricier homes. New home sales and starts of single-family homes in 2011 were the lowest since 1963. Almost 6 million Americans aged 25 to 34 were living with their parents in 2011; up from 4.7 million in 2007. Once young Americans coping with debt and high unemployment finally emerge from under those loads and start purchasing homes, it will be an indication of normality returning to the market.
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