Saturday, February 25, 2012

Student Loans Near $1 Trillion Hurt Young U.S. Buyers: Mortgages

From Bloomberg:

Roshell Schenck has a Ph.D 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, Pennsylvania, 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 homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” Federal Reserve Chairman Ben S. Bernanke said at a homebuilders conference last week. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”

The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers 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 FinAid.org, a student loan website. Recent college graduates carry an average debt load of more $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-olds.

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.

‘Drag on the Economy’

“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 sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

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 Realtors. 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.”


http://www.bloomberg.com/news/2012-02-16/student-loans-approaching-1-trillion-hurting-first-time-buyers-mortgages.html

Subprime: Those lovely student loans keep coming up on mainstream media articles. With funding for Universities drying up on the state level the gap will have to be shouldered by the students with more loans. Even Obama the Great referenced the cost of tuition in his State of the Ponzi address by taking a jab at the Universities. With the trillion dollar level reached (or about to be reached) it's only a matter of time until this tuition bubble pops. Comments under articles referencing the student debt time-bomb show younger people have caught on to the rip off and are very hesitant to take on the debt in exchange for a degree. I'm guessing that at some point even the wall street boys get pissed off as earnings get hurt due to younger Americans unable to afford big ticket items. Or perhaps serfdom is the way of the future for this country as 50% of S&P 500 revenues are derived overseas, affording less importance on the American consumer.

I hope to see students turn on their Universities as the cost of education is out of control, leaving millions of young Americans buried in debt. With younger households unable to purchase homes, how do boomers expect to sell their homes and retire? Oh, well they can sell them (so long as they aren't underwater) but for a much lower price than they ever imagined. But even the boomers are getting hammered with student loan debt as many of them are going back to school in order to increase their earning potential.

What a sorry state this country has devolved into. America the Great, not.

27 comments:

  1. Look, I'm sorry, but the fact is, Ms. Schenck is not able to afford her own home, despite her delusions to the contrary.

    I'm no fan of student loans, but we must also acknowledge financial reality. That $110k she owes is a legal debt. It is inconceivable for anyone to be able to afford a down payment for a house while carrying that debt. (If you have the money for that down payment, you should be putting that money towards the debt.) In turn, a down payment is a small fraction of the price of the entire house. If you demonstrably can't afford the down payment, you certainly can't afford the entire house.

    A lot of people don't realize just how expensive home ownership is, compared to renting. Typically the total cost is 40 to 45 percent above the base cost of the mortgage. It sounds shocking, but it's really not -- property tax alone can account for 20-30% extra cost. When you are already deep in debt, it's really not a good idea to take on huge added expenses, unless they somehow improve your situation enough to offset the cost. But, unlike other major expenses such as a car, owning a house does not increase your earnings capacity in any way (it might for some professions, but not pharmacists).

    Ms. Schenck needs to give up that sense of entitlement, and solve this problem the same way everyone else does. If you really can afford to buy a house, then you can afford to pay off that $110k loan. Pay off the student loan(s) first, and then buy the house. The loans are a good test of whether you can afford the house. If you can't pay off the loans, please PLEASE don't fool yourself into thinking you can afford a house.

    I get that student loans are a genuine obstacle to homeownership. But thinking that you can afford a home, when you really can't, just makes the problem worse. In fact, the kind of financial illiteracy exhibited by this person is a big reason why Americans have such an enormous debt problem in the first place.

    ReplyDelete
    Replies
    1. There are a lot of reasons to be a renter, but the reasons you and Suze have given are not the ones. The tenant pays the property and the mortgage but simply doesn't get any deductions. Being a landlord is not a charity situation. You charge the tenant a monthly rent that covers your costs, including mortgage principal and interest, property taxes, building insurance, and any HOA fees, plus a profit. In a very weak real estate rentals market, the landlord may have to charge less and thus sacrifice profit and even some of the property taxes. Thus, of course, is not sustainable in the long-term, as the landlord would go out of business, as many of them do, including Donald Trump.

      Delete
    2. For *comparable* housing situations, renting costs the same as buying. The key word here is comparable. Renting an apartment and buying a condo will cost about the same. However, the article talks of buying a "house", which is an upgrade from an apartment. One would expect a larger abode to be more expensive, and it is. Many many would-be homebuyers do not realize just how many hidden costs there are when upgrading to a house. They almost always just look at the mortgage and think they can afford that.

      Home ownership also involves a lot more active responsibility than renting. Though the expenses may average out to be the same, the timing of the expenses is different. If the apartment that you're renting needs a major repair, the landlord will just pay for it and build the cost into your rent. Owning a home, on the other hand, places the responsibility on you to save for big-ticket maintenance. In the grand scheme of things, that $110k of student loans is not that big a debt on her $125k salary. (I myself paid off a $200k mortgage in five years on a $100k salary. This is in Canada, where there are no tax deductions for homeowners, so no reason to keep a mortgage around.) She really should be able to pay that debt off pretty quickly. An inability to pay off those student loans quickly is a huge red flag that this person does not have the financial discipline or money-management skills necessary to own a home, even if the income and expenses should work out in theory. Any sensible mortgage lender can and should insist that the student loans are paid off first.

      The myth of huge tax deductions for home ownership is just way oversold. Itemized tax deductions only benefit you to the extent that they exceed your standard deduction. This is pretty hard to accomplish unless you're really well-off, especially for joint filers. For single filers there might be a small tax advantage to a home, but it's nowhere near enough to offset everything else I said.

      Delete
    3. This article originated in Bloomberg and the author took things said by Roshell out of context. Media is very good about bending things to prove their side of the story. We could afford a home if she wasn't working so hard pay off her debt and provide for her family. But please, closed minded people should proceed to trust everything the media states. Seeing as $125k after takes doesn't work out to be the take home amount.

      Delete
  2. Nice find Subprime. That's a great article. I have been saying all along for sometime that the higher education scam and student loan debt has to have a negative impact on the housing market. It's nice to see a high-profile publication verify that.

    ReplyDelete
  3. Yeah, at some point the economy is going to get bogged down so much by younger people being unable to afford homes that something will have to change.

    ReplyDelete
  4. Good point, 10:35. How is this for moving backwards?

    My brother in law graduated from dental school last May. He matriculated at about age 33. He is now 37 or 38. Prior to dental school, he owned a small home, with his wife - while working in an architecture firm. Sure, he felt that it was a dead-end job. So he decided to make a career change.

    He incurred a total of $245K in student loan debt, for dental school. Guess who cannot purchase a home, if it was infested by raccoons and on fire?! He is now living in some small community, in the frozen tundra. To make matters worse, his wife wants to get her PhD. (She has a worthless-ass MA in History from BYU, and teaches about one course each semester at diploma mill "University" of Phoenix.)

    ReplyDelete
  5. I can't feel any pity for this whiner. With $125,000 in pharmacist income, she should be able to pay her loans very easily and quickly. I paid mine off in 8 years (instead of 30), and I have not been blesssed like this ungrateful witch to make six figures. In fact, I have made very little money the last 3 years and have had to work in a job that is unrelated to my field and causes me intense mental anguish every single day. For the last 8 years, I have cut all spending and made huge sacrifices to pay off my non-dischargeable, life-ruining debt just so I could try and move on with my life after law school ruined it, so why does this whiner feel like she deserves a house? She should just shut up and be thankful she has a job in her field unlike so many of us underemployed/unemployed/temporarily employed lawyers and start paying her debt down. Then she can buy a house. She's probably the kind that will buy a home she can't afford just to impress the Joneses and then whine how she can't pay her mortgage.

    ReplyDelete
    Replies
    1. Good for you on paying back that debt load. I've been paying like a mad man myself. It blows but what other choice do we have?? I hope to be student loan debt free within 3 years.

      With regard to the pharmacist, I wouldn't be surprised that she ends up buying in a few years. With as much debt as she is carrying she shouldn't be looking for a home in the first place. Sadly, I know many people out there that are owe 6 figures and are still looking to buy. A few years of sacrifice can go a long way towards principal repayment.

      That being said, there are/will be millions out there that won't be able to qualify for a long ass time due to high debt and low income. Fucked up.

      Delete
    2. The pharmacist in this article was approached by a biased publicist trying to prove his own point. She is not seeking home ownership at this time because she IS working on paying off her student loans and supporting her daughter. Think about what you post on the Internet before you call people you don't know a "witch" or a "whiner". Anyone knows $125k after taxes these data isnt still six figures.

      Delete
  6. Slightly off topic question:

    How do WE profit? Anyway we can "short" this inevitable higher education bubble? I used to think hitting the for-profit schools were the way to go but their stocks are already wayyyyy down. Any others?

    ReplyDelete
  7. so glad i graduated from law school debt-free - I feel so bad for everyone who didn't.

    ReplyDelete
  8. some lawyers really need to stop whining

    ReplyDelete
    Replies
    1. "some" lawyers can "whine" all they want but the fact remains that by pummeling the legal profession just wait until you need a lawyer but the quality is so poor that your rights are not properly represented. We shall see who will be whining then, fucktard.

      Delete
    2. Economic theory predicts the opposite. The current situation is simply a painful labor market adjustment due to the likely permanent decrease in the demand for lawyers. Theory predicts that the supply of lawyers will eventually shift down via the eventual closure of lower tier law schools and the movement of many JDs into non-legal employment. However, there will be no decline in quality of the lawyers who remain in legal employment. Then the labor market will stabilize. It is painful to be sure and no one is to be faulted who graduated about the time the recession hit (it is impossible to predict recessions three years ahead of time). But individuals across many labor markets have to deal with the same issues (just read the blogs about unemployed PhDs in the humanities). What you are seeing is the messiness of labor market adjustments. It is always messy.

      Delete
  9. You've forgotten that the Student loans were and are bundled into investment trusts that fund Boomer's retirements. While the younger generation might not be able to purchase teh Boomer's McMansion, the loss of the annualized income and coresponding value from the Student Loan Investment Trusts that make thier retirement, makes thier retirement less likely.

    ReplyDelete
    Replies
    1. There isn't much data on ABS composed of student loan paper. However, I've read articles were wall street analysts were sifting through the loans and them recalling that "they had a good idea who was going to default."

      I wouldn't be surprised if the largest holder of said paper is the federal reserve as the central planners are buying anything not nailed down in their attempt to reflate the bubble.

      Delete
  10. to subprime
    -shrug- i am a lawyer. . . same as you, i'm totally against oversaturation of the legal market - but i still think your attitude and how hard you try does determine getting that first job OR first clients on your own - .i've already done both - its not as grim as everyone makes it out to be.

    and take you for instance, you say you could lose your job, well you know what? Now you got some experience, that alone sets you apart from 70-80% of job applicants. Best believe you're gonna get much more interviews if that were to happen (which of course, I hope doesn't happen)

    i have lawyer friends who have loans but they are top attorneys - a guaranteed six figure income through years of effort in one area of law helps. .

    ReplyDelete
    Replies
    1. Now you got some experience, that alone sets you apart from 70-80% of job applicants.

      Let's hope so bud. The job market is terrible, I would hope this experience would provide some buffer.

      Delete
    2. Oh, I know so bud.

      I do not dispute the legal market is 100 times worse for newly licensed attorneys, there is no question there. The amount of applicants dwarfs the number of openings.

      However, for certain areas of law, the more experience you get, the smaller the pool of applicants there is. It is just like law school, the class grows smaller every year, then there's the percentage of the graduating class who passed the bar the first time, then there's the percentage who did get full-time associate jobs, then there's the percentage who kept those jobs for 2-3 years and did some good work. It is just like a pyramid.

      By the end, you got a very small pool of applicants, and those applicants can pick and choose where they go. It is almost a complete reverse of what the market feels like after you pass the bar exam. Is the work stressful and hard? Oh yeah. But is the work available? Absolutely.

      For the area of law I am interested in, employers have told me up front they cannot find anyone who has 3 solid years of experience, there just are not that many out there. Those applicants can line up an interview just by applying, and reasonably expect to get offered close to six figures starting, plus benefits, if they get an offer.

      I have followed your blog, you said you have flourished at your job and 2011 was a stellar year for you.

      I cannot speak to your area of law and what effect the market has had on demand for its legal services, but I can say with total confidence you have already set yourself apart from the competition if you were to walk into another interview. My guess is in 2 more years, recruiters are going to start approaching you with offers, not the other way around.

      Don't believe me? Shoot your resume with updated experience for kicks, and see how many employers call you for an interview. I may be wrong, but I doubt it.

      Delete
  11. I've already updated my resume in the event of a layoff. Curious to see what would happen. I do see tons of job adds for 3 years plus experience. I have a few cases set for trial so with trial experience I would HOPE that would be sufficient for future employment. Now a good verdict would be huge. Thanks for the tips.

    ReplyDelete
  12. I'm looking for a way to take short positions on student-loan "asset" backed paper; anyone have any ideas, other than shorting Sallie Mae, which is easy enough to do, although SLM has crashed so bad already a short position won't make much from here unless they hit zero.

    ReplyDelete
  13. What if the problem on student loans continue? It seems like there isn't a single solution given to student loan crisis yet so I am kinda hesitating to apply for a student loan lately.

    ReplyDelete
  14. elley ended after she demanded an $80 million fee for leveraging her connections, the paper said.
    That deal may have gone bust. But Kelley's identical twin sister, Natalie Khawam, profiwww.needrapidcash.com

    ReplyDelete
  15. Hi! Do you happen to own any blogging skills or this is a completely natural talent? Can't wait to hear from you.

    ReplyDelete
  16. The quality of your blogs and conjointly the articles and price appreciating.online loans

    ReplyDelete
  17. eToro is the #1 forex trading platform for novice and advanced traders.

    ReplyDelete

Real Time Analytics