How a Broken Education System Affects Real Estate

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Economic Highlights of the Past Week

 Real Estate
*22.5% of all U.S. homes (nearly 11 million properties) are still underwater, down from 24% a year ago.  Nevada at 60% and Arizona at 49% are the “leaders” (9/13/11 Housing Wire)
* FHFA, regulator of Fannie Mae and Freddie Mac, is considering whether to allow refinancing in excess of 125% (9/12/11 Mortgage Daily)
* Fitch downgraded several homebuilders, including knocking KB Home from B+ to BB- (9/12/11 Housing Wire)
* Mortgage servicers started the foreclosure process on 78,800 properties in August, up 33% from the month before but 18% below the previous August, just before the robo-signing scandal (9/14/11 Housing Wire)

* The income of the typical American family is roughly where it was in 1996, adjusted for inflation (9/14/11 WSJ)
* Retail sales in the U.S. were flat in August (9/15/11 WSJ)
* A record 46.2 million Americans are below the poverty line (9/13/11 MarketWatch)
* Unemployment-benefit applications rose to 428,000 (9/15/11 MarketWatch)

Two articles in the Wall Street Journal (9/13/11) earlier this week highlighted the severity of the economic and unemployment situation in the U.S., how the government continually demonstrates its ineptness, and the country’s lack of a cure for its current ills.  Although these stories may at first seem to be interesting abstractions for real estate investors, they actually point out current and future problems for the industry.

The first article, titled “Student-Loan Defaults on the Rise,” noted that default rates on student loans are up sharply in recent years.  As of September 30, 2010, 8.8% of federal student loans whose payments began coming due during the previous fiscal year were in default.  Pew Research found that most of the problem comes from for-profit colleges, which represent only 9% of all students but 25% of Federal Pell grants and loans, and 44% of all student loan defaults.

A study by Rutgers University found that only 53% of students who graduated between 2006 and 2010 had full-time jobs.  This ties closely to an article that I wrote last June citing research showing 22% of 2010 grads are unemployed and 22% work in jobs that don’t require a college degree.  Current high-school students apparently are not getting smarter than their older peers.  A 9/15/11 WSJ piece tells of how SAT reading and writing scores hit a low for the 2011 graduating class, with only 43% of students being ready for college.  When most of the younger segment of our adult population carries large student loan balances and cannot get well-paying jobs, this has a dramatic impact on sales of starter homes.

A 9/13/11 WSJ opinion piece by James Bovard reflected on how federal government job training has been an utter failure.  He noted that between 1961 and 1980, the Feds spent tens of billions of dollars on federal job training and employment programs without keeping any meaningful statistics.  A 1982 job training act called JTPA went beyond a waste of money, as the young trainees were twice as likely to be on food stamps after the program as before, partly because the training included a section on applying for government benefits.  A 1993 study of JTPA found that those who participated in the training had 10% lower earnings than a control group.  By the way, the Georgia Work$ program that the current administration wants to emulate has produced less than 200 jobs this year. 

What does this mean for real estate?  From an education standpoint, it means that weaker performing students will be going to college, and that current and future college grads are less likely to have good-paying jobs that would allow them to buy a house.  Young adults with little or no income won’t be able to get a home loan, and couldn’t pay it back if they did.

For those who don’t go to college, government training programs are not the answer.  They run up huge taxpayer bills without any meaningful skills being developed.  These folks won’t be buying a house either.

The lack of income for younger adults also affects older generations.  People who currently own a small house and want something bigger to accommodate a growing family will have more trouble selling their old house.  This impact carries right up the chain to all but the most expensive houses.  Of course, the lack of home sales naturally affects the livelihood of realtors, banks, appraisers, and everyone else tied in with these types of transactions. 

In my view, the short-term prospects for real estate in general are bleak.  If the government would stop meddling, then home prices could go to a more natural level (still lower than today) and recover over the medium and long terms.

About Author

Alan Noblitt

Alan Noblitt is a nationwide note buyer and a licensed real estate broker in California. His business, Seascape Capital Inc., started in 2002.


  1. Why should people need good-paying jobs to buy a house? Why should someone with a low-paying job be a rent slave, building wealth for his landlord but none for himself? If government allowed the sale and occupancy of tiny houses on tiny lots, people with low-paying jobs could buy a house. Simple solution, just allow people to buy what they can afford.

    • Terry,
      I’m not sure that I understand the issue here. Yes, low-income folks can own a home too, but only if they can afford to pay the mortgage, maintain insurance, and handle upkeep of the property. The key is whether they can afford these things, as lenders during the first half of the last decade were making loans to people who had almost no chance to pay them back. THAT was the big problem.

      I would point out that there is nothing wrong with renting. Not everyone can or should own a house.

      Thank you for your comments.

      Alan Noblitt

    • Gabe,
      Yes, you are absolutely right that a weak education system affects more than just real estate. However, since this is a forum for real estate folks, that is where I focused my attention.

      Thanks for your comments.

      Alan Noblitt

  2. Great article! I totally agree, we are facing some serious problems in the road ahead. The sad things is I don’t think this is a cycle, I believe this is the new normal. The gobal economy will continue to get more competitive and the students of tomorrow will be competiting to earn less. In my opinion this is the time to be bullish on rentals, backed with fix-rate debt. Thanks for the writing the article.

    • Arthur,
      I think you’re right, and we can look at what has happened to Japan over the last 20 years as an example of what will probably happen with us (at least parts of it). Owning a rental is a good idea, as long as you have strong tenants who take care of the property and pay their bills.


    • Hi Jacque,
      I assume that you were asking a question rather than making a statement? People who are up to their eyeballs in student debt or who cannot get a good job because of no education have little chance of ever getting a loan for a house. Although they may seem like completely separate issues, student loans, job training, real estate, and a hose of other variables all come together when talking about peoples’ finances.

      Thank you for your comments.

      Alan Noblitt

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