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Student debt, lending rules stymie first-time homebuyers

Education comes at a price, and not just the cost of the degree itself. We’re talking about the inability to take advantage of today’s low mortgage rates and stable prices.

Student loans are now cited most often by young buyers as the main expense that prevents them from saving for a down payment. Nothing new there, perhaps. But a new report is the first to quantify the impact.

According to John Burns Real Estate Consulting, some 414,000 new home transactions will be lost this year because of student debt. At the average price of $200,000 per house, that translates to about $83 billion in lost business.

Burns analysts Rick Palacios Jr. and Ali Wolf say that in a typical year, about 8 percent of people aged 20-39 would normally buy a house. But many are weighed down by their student loans. Every $250 per month in student debt reduces young buyers’ purchasing power by $44,000, the 30-page report maintains. And of the 16 million people in the first-time buyer cohort, 5.9 million – 35 percent – pay more than $250 a month on their school loans.

Indeed, 5.9 million heads-of-household under age 40 now pay more than $250 a month in student loans, the Burns study found. Large monthly payments like this can easily push would-be borrowers over the 43 percent debt-to-income ratio cutoff set by most lenders.

Here’s another way to look at the issue: Assuming a median first-time buyer income of $61,000 and a maximum mortgage for the typical first-timer, you’d be able to qualify for a loan of up to $234,000 as long as you carried no extra debt.

But if you have pay $250 on student loans per month, your maximum mortgage would be cut to $190,500. If your payment was $500, you could borrow only $147,000.

Since 2005, the amount of student loan debt has swelled, now exceeding $1.1 trillion, the report states. And the average balance has nearly doubled during that period, from $10,650 to $21,000.

Historically, better-educated, higher-earning consumers were more likely to become owners by age 30. But that trend reversed itself in 2012 and continues today. Now, it’s 30-year-olds with no history of student debt who are more likely to become owners.

Some 45 percent of all 25-year-olds have student debt. But that’s not the only thing that’s holding them back.

Lending restrictions

Another report, this one from the National Association of Home Builders, says 83 percent of builders polled in August lost sales over the previous six months because their buyers could not qualify for financing.

Contracts can fall through for any number of reasons. But well over half of the builders said lending standards were too tight for many first-timers to make the grade.

“If 83 percent of the builders lost 9.7 percent of their sales,” said NAHB economist Paul Emrath, “that works out to an estimated 18,700 new home sales lost because buyers were unable to qualify.”

Said NAHB Chairman Kevin Kelly, a builder from Delaware: “NAHB advocates for prudent lending standards, but we’ve seen banks and regulators swing the pendulum too far and create an environment where lending standards are too restrictive.”

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