Housing advocates continue to worry about a shortage of Millennial first-time home buyers in the residential marketplace nationwide because of the burden of student-loan debt.
More than 43 million Americans owe a whopping $1.4 trillion in outstanding student debt. Seventy-one percent of America’s non-homeowners (apartment renters) believe their student debt has delayed them from buying a home or condominium, according to data from the National Association of Realtors (NAR).
“For too many borrowers, student debt feels like a big barrier to the dream of homeownership,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and former assistant director of the Consumer Financial Protection Bureau.
However, there are changes in the wind for young borrowers who managed to buy a home despite hefty student-loan debt.
Fannie Mae recently updated its Selling Guide to permit originators that sell loans to the mortgage giant to offer a new refinance option for the purpose of paying off a student loan. Proceeds from the refinancing will go directly to the student loan servicer to fully pay off at least one loan.
Targeting current and future homeowners with student debt create both opportunities and risks for consumers, especially for those who use mortgage credit to pay off a student loan, experts say.
“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” Chopra said.
“For borrowers with solid income and stable employment, refinancing can help reduce the burden of student debt,” Chopra said. “But for others, they might be signing away their student-loan benefits when times get tough.”
Fannie Mae’s policy change will likely have the effect of greater availability and lower interest rates for homeowners refinancing their mortgage to pay off college loans.
Homeowners who tap home equity to pay off student debt give up their rights to income-driven repayment options on their federal student loans, which cap federal student loan payments at roughly 10% of their income.
Income-driven repayment is a critical safeguard during periods of unemployment or other income shocks that help avoid the consequences of default. Homeowners may also be trading away loan forgiveness options available to teachers and others who work in public service.
“While these changes won’t change those feelings overnight, they may help the mortgage industry adapt to the financial realities of today’s aspiring homeowner,” Chopra said.
Yet another road block to the American Dream of homeownership looms on the horizon. A new report released by Freddie Mac explores the Hispanic-homeownership gap, which not closing fast.
At 45 percent, the nation’s Hispanic homeownership rate was 26 percentage points less than the homeownership rate for Whites in 2015, Freddie Mac reported. The homeownership gap was 29 percentage points in 1995.
“For decades, the homeownership rate of Hispanics has remained more than 20 percentage points below the rate for Whites,” noted Sean Becketti, chief economist for Freddie Mac. “This gap has narrowed in the last 25 years, but very slowly.”
White and Hispanic populations are growing and aging at different rates, Becketti said. The average age of Whites is expected to increase by six years over the next 45 years, compared with nearly 10 years of age growth for Hispanics.
“If these U.S. Census projections about age distributions are realized, the White/Hispanic homeownership gap is likely to narrow by 20 percent by 2035,” Becketti said. “In addition, changes in other factors like income and education should further reduce the Hispanic-homeownership gap.”
Another long-term trend not favoring Hispanic homeownership is shrinking home affordability and slow wage growth.
The U.S. median home price hit $253,000 in second quarter of 2017—up 7.7% from a year ago. This is the least affordable level since the third quarter of 2008, and a nine-year low in affordability, reports ATTOM Data Solutions, the nation’s largest multi-sourced property database.
“While home-price appreciation in the second quarter of 2017 accelerated to the fastest pace in more than three years, wage growth turned negative, posting the biggest year-over-year decrease in five years in the fourth quarter of 2016—the most recent average weekly wage data available,” said Daren Blomquist, senior vice president at ATTOM Data Solutions.
The average weekly wage nationwide was $1,067 in the fourth quarter of 2016, down 1.4% from a year ago—the biggest annual decrease since the fourth quarter of 2011, reports the Bureau of Labor Statistics.
“That combination of accelerating home-price growth and slowing wage growth, along with mortgage interest rates that are up nearly 50 basis points from a year ago, eroded home affordability nationwide to the lowest level in nearly nine years,” Blomquist said.
Median home prices in the second quarter of 2012 grew at a faster annual pace than average weekly wages in 403 of the 464 counties analyzed in the report, which included Cook County, Illinois in the Chicago metro area; Los Angeles County, California; Maricopa County, Arizona in the Phoenix metro area; San Diego County, California, and Orange County, California.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.