Is Increasing Student Debt Driving Home Prices Higher?
Let me start by saying, I'm no economic expert. I read a lot, but so does everyone else on BP. This is my theory, and I'm interested what all the smart and experienced folks on BP think about it. So here it goes:
Student debt has quadrupled over the last decade. This article shows some stats. Why has student debt gone up? Because the price of education has increased. And the price of education has increased because the demand for education has increased dramatically. There are 1 million + 1 factors why demand for a college degree has increased, but simply put - it's a requirement for nearly every desirable job today. Shortly after the turn of the century, supply of education began trying to meet demand for a college education via online programs, new local/regional schools, etc... but that has done little to slow the education price hikes. So I ask you - how many folks can afford a $63K price tag per year (my alma mater's current tuition & room)? That's significantly more than the average household income. Suddenly the $15K guru seminar is looking much more appealing.... JOKING :)
Ok, so that explains the price of one economic market - the market of education. But how does this relate to the housing market? Well, let's rewind the clocks...
I'm a millennial - 26 years. Many moons ago, when my parent's were my age, a lot of people (I would dare to say 'most') didn't have the relative amount of student debt First Time Homebuyers (FTH) have today. When banks looked at our parents' financial picture and reviewed their existing debt obligations, there usually wasn't much personal debt the mortgage bank had to compete with. So, 20% down and near double digit rates was the norm. But this doesn't work for today's FTH's - they're already up to their eyeballs in student debt and don't have enough cash for 20% down. So to perhaps keep the housing market liquid, since it is the backbone of our economy at ~20% of the U.S. GDP, banks have come up with some brilliant ways for an entire generation of borrowers to keep buying homes (and getting into more debt). Enter the current financing landscape...
I believe it's safe to say low down payments and low interest rates are driving home prices sky high. I believe to counteract what should be healthy consumer hesitancy to buy a house (hesitancy in part due to student debt), banks have been offering unsustainable subprime mortgages. We have FHA loans which only require a 500 FICO. According to Ray Brousseau, an EVP at Carrington Mortgage Services, Carrington has been able to offer loans to borrowers with low FICO scores because the 'employees' have 'experience managing subprime loans'. Queue the groans from the skeptics. Also, BofA is now offering loans at 3% down. Of course, FHA can't be the only one attracting borrowers.
So what happens when interest rates eek up? How much of an impact does that have on prices? Are we poised to tumble due to the highly leveraged market?
I have no idea :) - which is why I asked you guys. Maybe I watched 'The Big Short' one too many times... Keep me honest folks and give me a clear picture.
Cheers,
-Marcel