How student loan interest rates affect the real estate market Reply

UMass Amherst.

The rise in student debt is a concern for economists looking at the future of the real estate market.  If Congress fails to act and allows the interest on student loans to double on July 1, it will make buying a home harder for college grads.   As baby-boomers look to sell their homes, economists believe that those between the ages of 17 and 31, also known as “echo-boomers” or “millenials” will be the demographic buying up those homes in coming years.

According to economists with the National Association of REALTORS® (NAR), the economy is making it tougher for the so-called echo-boomers, a demographic estimated to consist of 62 million people, to purchase a home.

“In addition to having seen the worst housing downturn, these younger buyers have been hit hard by the recession. Faced with an uncertain job market, no real income growth, tighter mortgage lending rules, and mounting student and credit card debt, it is no surprise that some of them do not put priority on homeownership.”

Further, with rising tuition costs, the so-called echo-boomers face increasing student debt that, subsequently, has increased their debt-to-income ratio, which will make it harder for them to buy a home.   Citing research studies, NAR claimed that the average student debt rose from $12,750 in 1996 to $25,250 today.

The debt-to-income ratio is the formula, among others, mortgage lenders use to determine a potential home-buyers credit worthiness.  The higher percentage of debt that you have in relation to your income, the less qualified a homebuyer is to take out a mortgage.

Adding to the challenges recent college graduates face, Congress has still failed to act to extend the  College Cost Reduction and Access Act, which is set to expire on July 1.   If Congress fails to act by July 1, the interest rate on student loans will double.   This will further  increase the student loan payment graduates make each month as it further increases the debt-to-income ratio.

According to projectonstudent.org, the average debt in 2010 for a college graduate in Massachusetts was $25,541.  Here is a look at debt of the graduates from the Five Colleges Consortium.

Institution Average Debt Percentage of Students w/Debt
UMass, Amherst $25,420 68%
Amherst College $12,843 42%
Hampshire College $21,673 58%
Mount Holyoke College $22,499 66%
Smith College $20,989 69%

Specializing in western Massachusetts real estate, call Michael Seward at 413-531-7129 if you are planning on buying or selling a home in the Pioneer Valley.

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