Thursday, February 16, 2012

Business Week Article: Student Loans Near $1 Trillion Hurting Young Buyers: Mortgages

In November I posted about how President Obama was feeling the burden of student loan debts and the rising prices of a college education. Well student loans are at it again, not only are they effecting  students and parents, but they are contributing to our weak economy and the bounce back of the mortgage industry.

In Business Week this morning there was an article discussing how student loans near $1 trillion is hurting young home buyers.

Roshell Schenck has a PhD in pharmacy and earns $125,000 a year, yet can't qualify for a mortgage for a house for herself and her 9-year-old daughter. The 2008 graduate of Lake Erie College of Osteopathic Medicine, in Erie, Pennsylvanian, has more than $110,000 in student debt.

"I'd love to buy and can afford to buy," said Schenck, 28. Since lenders place closer scrutiny on college loans than in prior years, she says, "it's almost impossible for me to get a loan. My debt is crushing my chances of purchasing a home."

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, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said.

"Potential first-time home buyers have been disproportionately affected by the very tight conditions in mortgage markets," said Federal Reserve Chairman Ben S. Bernanke at a home builders conference last week. "First-time home buyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly."

According to the Fed's white paper 9 percent of 29- to 34-year-old's got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. "This data suggest a large decline in mortgage borrowing by potential first-time home buyers due to not only weaker housing demand, but also the effect of tighter credit conditions," the Fed said.

Outstanding education debt surpassed credit-card debt last year for the first time, according to Mark Kantrowitz, publisher of, a student loan website. Recent college graduates carry an average debt load of more than $25,000 each, which can limit their ability to qualify for mortgages even if they're fortunate enough to land a job in a market with an unemployment rate of 9 percent for 25 to 34 year-old's.

Calling it a 'student-loan debt bomb,' the National Association of Consumer Bankruptcy Attorneys warned Feb. 7 about the effects of rising student debt on recent graduates, parents who cosigned their loans and older Americans who have gone back to school for job training.

"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 stimulates the economy, so to are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future," said John Rao, vice president of the NACBA.

People age 25 to 34 made up 27 percent of all home buyers in 2011, the lowest in the last decade and compared with 33 percent in 2001, according to the National Association of Realtor's. At the same time, first-time buyers last year accounted for 37 percent of all purchases, the lowest since 2006, when home prices peaked and the housing boom was showing cracks.

"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," said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, California. "these things pile on each other and tell us it's not going to help the housing recovery right now."

So it seems that things might look good on the surface, but when you get down to the details you know that we are still in trouble when it comes to first-time home buyers and their ability to really help boost the housing industry.

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