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Student loan debt is not hurting America’s housing market


Two of the most salient economic trends today are the declining share of first-time homeowners, and the sharp increase in student loan debt outstanding.

Given the fact the housing market has slow to returning to normal (though things seem to be turning around of late), it’s natural that economists and journalists would assume that it’s student loan debt that’s been holding it back.

It’s this logic that has given us such articles as, “Your Student Loan is Killing the Housing Market,” published last fall in USA Today, in which the author cites an estimate from a housing consultant which argued that student loan debt is costing the real estate industry more than 400,000 transactions per year to the tune of $83 billion in sales.

Couple such statistics with other anecdotal evidence like the story of Rachel Heffner, who would like to buy a home but is prevented from doing so by her $691 monthly payment on more than $60,000 in debt — detailed last year in an article in the Wall Street Journal, and it becomes a very convincing narrative.

The problem is, there isn’t any proof that higher student loan debt is actually causing young people to own homes at lower rates than they did in the past, or that the overall student loan burden is leading to a smaller share of first-time home buyers. These trends could be caused by other factors, such as a cultural shift that has led young adults to delay all sorts of decisions, from buying a home, to marrying and having children. Furthermore, the financial crisis caused widespread harm to every demographic group, causing drops in homeownership rates and credit scores across the board.

To test just how student loans are affecting the behavior of potential home buyers, researchers Jason Houle of Dartmouth College and Lawrence Berger of the University of Wisconsin drew on data from the National Longitudinal Study of Youth’s 1997 cohort, so that they could track a group of young people through their young adulthood to pinpoint, with other factors like socio-demographic factors (for instance, do you come from a wealthy family), to, as best they can, pinpoint the effects student loan debt specifically has on homeownership.

Houle and Berger, who published their results Monday with the support of the think tank, Third Way, write:

We do find evidence of a negative, statistically significant association between student loan debt and homeownership in some models, the association is substantively small to modest in size, and we find no evidence that the probability of home ownership decreases as the amount of student loan debt taken on by debtors increases. Thus, it seems unlikely that student loan debt is causing a generation of young adults to flee from the housing market; nor does it seem to be the case that student loan debt is primarily responsible for the slow post-recession housing market recovery. However, even if student loan debt isn’t reducing home buying, it may well be impacting young people’s well-being in other ways.

In other words, there is a slight (0.8%) decrease in probability for someone with student loans to own a home versus someone who has no loans at all. But the researchers weren’t able to find any evidence that someone with more student loans is statistically less likely to own a home than someone with a smaller burden. Why might this be?

  • The median student loan debt just isn’t that high — somewhere in the range of $15,000. That might come out to a monthly payment of $150 or so, not an amount that will make or break your ability to make a mortgage payment.
  • There is still a large, though declining wage premium between college graduates and non-graduates. That $150 per month that your median college graduate is making is going to be made up by the fact that a college graduate earns more.

That doesn’t mean that rising student loan debt shouldn’t be of concern for policy makers. The group that Houle and Berger studied are now in their late 20s, and it is possible that we’ll see their increased student loan burdens start to effect homeownership as this group continues to age. It’s also possible that as college gets more expensive and debt more burdensome, that the next cohort of graduates will be in worse condition than those today who are pushing 30.

That said, these results do tell us that the primary concern should not be that today’s graduates are over indebted. Rather, of bigger concern, as Third Way’s Senior Vice President for Policy, Jim Kessler, suggests, is the “dismal” graduation rates college students achieve overall. The group of students who go to school, perhaps borrowing money in the process, see all the downsides of debt with none of the benefits of a college degree. Only about 55% of students who start a degree finish within six years, “a completion rate that looks like a poorly performing high school,” Kessler says.

By all means, we should focus on ways to defray the cost of college and help students finish with less debt. But the real crisis in American secondary education is that too few people are getting a degree, not too many.