Student Loans and The Economy
What’s the difference between a high school graduate and a college graduate? About $50,000 in debt.
The real estate market is recovering, the economy isn’t. Most indicators – employment, personal income, manufacturing, durable goods, GDP – and consumer sentiment show that the economy is stuck in a rut, in spite of a handful of doses of quantitative easing (Federal Reserve money printing to buy U.S. Treasuries and Mortgage Backed Securities and put downward pressure on interest rates).
Home prices are rising because there is little inventory available, not because of widespread buying.
Inventory is being held back because:
-many home owners are still underwater from the last real estate bust and can’t sell;
-still other home owners who have positive equity in their homes are viewing the recent uptick in home prices as a sign that prices will continue to rise and are holding back on listing their homes hoping for higher prices; and
-new home starts in the past five years are well below their historic average.
Since higher prices don’t drive demand, other than in a bubble market, it’s wishful thinking to believe that a robust real estate market is developing. Indeed, higher prices would probably mean fewer sales. The ideal circumstance of a steady market based on a growing economy is not developing. Instead we have rapid price appreciation in many metros fueled by low inventory and low interest rates.
“Housing is back”! Spencer Rascoff, CEO of Zillow recently declared. It appears to be, if you judge the market based on home prices. Where, however, is demand going to come from to keep the real estate market going?
Demand for products and services should come from a healthy economy that has increasing employment, rising wages, savings and investment. None of these are present in the current economy. What is present and helping to fuel housing demand and support the real estate market are low rates artificially generated by the Federal Reserve through its “tool” quantitative easing. The impact of quantitative easing is even more pronounced in the stock market that continues to hit new highs in spite of a sluggish economy.
The real estate market should be reflective of the health of the economy, not the driver of it. The Fed’s low interest rate policy, however, is driven explicitly on the misguided notion that if interest rates are kept low it will drive the real estate market which in turn will lift the economy. People borrowing money and moving in and out of houses does not drive a sound economy.
These low interest rates won’t last indefinitely either because the Fed will pull back its quantitative easing experiment (unlikely), inflation takes off forcing the Fed to raise rates, or the market eventually demands higher rates in return for the risk of investing in a sovereign that has no ability to pay without resorting to printing more money. A modest increase in interest rates would dramatically increase the United States’ borrowing costs and stop the real estate market and the economy in its tracks.
Who is Buying Homes and Where is the Next Wave of Buyers Going to Come From?
Current Fed policy has enabled those that have jobs and access to credit to take advantage of low mortgage interest rates to buy homes. Prior Fed policy that helped bring about the housing bust of 2006-8 has enabled those fortunate enough to be flush with cash (including a fair amount of foreigners) to scoop up distressed properties. Unfortunately for the housing market, there are not enough people in these situations to engender a widespread and sustainable housing recovery.
This is especially true among those aged 18-35. This group of potential first time home buyers is in bad shape. “Millennials”, or those in “Gen Y” face high unemployment and soaring student loan debt, which, according to a Fed study many have already started to default on in alarming numbers.
The plight of today’s jobless young people will become a blight on the real estate market and the overall economy.
The cost of a college education has soared in the past ten years, outpacing the Consumer Price Index since 1985 by a wide margin-500% to 114%. The cost of higher education has made taking out loans a necessity for most college bound students. The price of a college education has been bid up in part by the artificially created demand of government guaranteed student loans via Sallie Mae. Students have become less price sensitive to rising tuition costs because they are relying more on borrowed money. This dynamic has allowed collegeS to institute tuition increases year after year. Imagine what the cost of an iphone or PC would be if the government guaranteed loans to buy them!
The mantra everyone has to go to college is eerily similar to the ‘everyone must own a home’ cries of the mid 2000’s and the complimentary government plan to help make sure it happened - never mind the ability to afford one! In all there over $1 trillion in outstanding student loans – all backed by the U.S. government – and the default rate is climbing while the employment situation for graduates isn’t getting any better.
Try Getting a Second Mortgage When you are Late or in Default on Your First
A recent unemployed college graduate owing tens of thousands of dollars on his student loan is in the unenviable position of trying to get the equivalent of a second mortgage when he has no job, no job experience and no collateral other than a diploma. Further this person may have defaulted or is delinquent on his student loans. He can’t even walk away from his education and return the diploma in exchange to forgiveness of the loan. Student loans can not be discharged even in bankruptcy.
Unless the economy improves many Millennials will remain unemployed, underemployed,indebted and unable to buy homes. The worst part of this is it seems many college graduates are content to wait it out until the economy improves or perhaps worse, take out another loan and attend graduate school.
Real estate market cheerleaders point to a recent survey conducted by Pulte homes showing that Millennials are as interested in home ownership as their predecessors.
A poll showing Millennials’ desire to own homes is a meaningless indicator of future housing demand as their ability to buy homes based on their economic circumstances is severely restricted.
The poll might as well have asked them if they were interested in becoming millionaires, major league baseball players or movie stars. Demand does not spur supply unless that demand is real, backed by something other than want. Demand and desire are infinite, supply and production while often plentiful are always finite.
The old adage where there is a will there is a way does not apply. You can’t get water out of a(n indebted/unemployed) stone is more appropriate.
Realtors, perhaps, should not count on an improving market to turn into a roaring one to solve their sales woes. Rather, they should focus on honing their marketing, client services and sales skills to gain a competitive advantage in what may be a very modest real estate market in the years to come.
Waiting on Gen Y Household Formation
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