By Patty Moore, a blogger who writes about personal finance, careers, and family. You can follow Patty on Twitter @WorkMomLife.
Research published this July by the Federal Reserve Bank of New York shows that the explosion in student debt in the 21st century has significantly lowered home ownership rates among young people. Although the study centered on people in the age 28-to-30 cohort, the results are generally applicable to the Millennial generation – folks born between 1980 and 2000. The negative implications to the U.S. economy, both nationally and locally, are substantial. The Millennial home-ownership gap hinders the U.S. economy, because 70 percent of economic growth depends on household spending – homes, furniture, appliances, cars, etc.
Student Loan Debt
Student loan debt doubled to more than $1.4 trillion between 2009 and 2015, and has risen another 13 percent since then. More than 44 million Americans have student loans, and the average debt owed by a 2016 graduate is up 6 percent since last year, to $37,142. The rate of loans that are at least 90 days’ delinquent is 11.2 percent, and the average monthly student loan payment for borrowers aged 20 to 30 years is $351. The interest rates on student loans range from a low of 3% on federal student loans, to a high of 15% on private student loans. The current age group of 25 to 34 is more highly educated than previous ones, a fact that can be ascribed to almost $1 trillion since 2010 in federal tax credits, grants and loans to college students.
Education vs Home Ownership
American homeownership declined between 2007 and 2017, of which 35 percent is due to high student debt. About 360,000 additional young people would have owned homes in 2015 had tuition remained stable at 2001 levels. The evidence shows that high student load debt has left Millennials gun-shy when it comes to committing to home ownership. While it isn’t the only factor affecting Millennial home ownership – cultural attitudes and a renewed interest in urban living must also be considered – student loan debt is responsible for at least 11 percent of the reduction in home ownership among Millennials.
The New York Fed has found that higher education costs don’t deter college attendance, it simply increases student loan debt. The Fed used data describing how public college tuition grew from 2001 through 2009, thereby increasing student debt in 2003 to 2011 for 24-year-olds. This reduced the ability of those aged 28 to 30 to buy homes during the 2007 to 2015 period.
The data points to an interesting phenomenon: States that hiked public college tuition the most did not see a decline in the skill of their workforce, but did see reduced house-related spending and weaker wealth formation among younger people. Millennials with the most student loan debt are more likely to be living with their parents instead of buying their own homes.
The latest study reinforces the NY Fed’s side in a dispute between it and the Obama administration, which had criticized earlier studies and minimized the causal link between tuition hikes and the decline in homeownership. The new Fed study reveals the struggle most recent college students have paying their bills. In fact, a majority of students who graduated or otherwise left college in 2009 faced higher loan balances in 2014, or had defaulted or were delinquent at least four months.
The Millennials are the first generation to use the Internet to find their first homes. The wealth of online data and the financial straitjacket imposed by high student loan debt work together to help make Millennials fussy home buyers. With little extra cash available for serious home renovations, Millennials are more likely to seek out homes that don’t need much work and are ready for immediate occupancy.
Millennials can review homes on the Internet to find ones with the features they want: A good location, updated bathrooms and kitchens, access to good cellular and Internet service, green features and open floor plans. In this way, they avoid having to shell out scarce dollars shortly after purchase. A survey in Inc. magazine shows that just 11 percent of Millennials consider a home to be permanent, meaning there is less interest in renovation. Older homeowners who want to sell into the Millennial-dominated market would do best by fixing up their homes before putting them on the market.
Millennials see starter homes as temporary assets, as 68 percent of them plan to move on to their long-term homes within six years on average, and don’t want to mess with first-home renovations. Surprising, the Inc. survey finds only 25 percent of Millennials living in urban areas whereas 50 percent are suburbanites. To some extent, this contradicts other surveys showing that Millennials prefer living close to work and play, a feature associated with urban areas.
Millennials compose 66 percent of the demand for starter homes (34 percent of all homebuyers), and more than 66 percent of Millennials plan to purchase a new home sometime in the next five years. To compete, older home sellers need to understand how to prepare their homes. This involves making all repairs and upgrades prior to listing, especially to bathrooms and kitchens. An energy audit can show ways to boost a home’s efficiency and perhaps justify solar panels, solar hot water heaters, new appliances, thermal windows and programmable thermostats, to name a few.
With more than 75 percent of Millennial homebuyers making decisions based on online research and 60 percent doing walkthroughs motivated by Internet listings, its crucial that older sellers pay attention to the marketing approaches (i.e., Internet presence) that succeed with choosy Millennial buyers saddled with record amounts of student debt.