Traditionally in America there is a natural story around college graduates and real estate. It goes something like this: young people go to college, get an education, get a good job (or start a business) and then a few years later, in their late 20s or early 30s, they buy their first house.
This first-time home purchase has been considered vital to the growth of the real estate market. There are more of the affordable, entry-level, $200,000 homes than there are $2 million homes across the country. The market needs these first-time buyers so those living in the $200,000 starter home, now with established careers and bigger families, can move up to the $600,000 forever home in the dream school district.
The first-time home purchase starts a chain reaction that moves others upmarket.
But, is that story changing? More specifically, are the skyrocketing student debt levels keeping the 20-somethings from buying their first home? And will this affect the rest of the real estate purchase chain?
Student Debt by the Numbers
This Forbes analysis breaks down student loan debt. A couple of relevant points from the analysis are:
- 44 million people hold student debt with a median balance of $37,172.
- Total outstanding student loan debt is $1.3 Trillion.
- 30-39-year-olds carry the most debt (mostly late Millennials and some early Generation X).
- More than 2 million people have student loan balances of more than $100,000.
These numbers could mean a delay in making that starter home-buy if the prime first-time homebuyer looking to make his or her purchase is carrying all this debt. The major issue is saving for a down payment, while paying student loan debt and still paying rents that have been steadily rising in major metro areas.
Despite the apparent gravity of the student debt burden, there are other factors to consider as they apply to real estate demand.
More People Moving to Cities
According to the World Resources Institute, the trend between 1950, and projected to 2030, is unmistakable. More people across the world are moving to cities. Here is the data in spreadsheet format for in-depth reference. When looking at just the expected growth of urban dwellers from 2010 to 2020, only one country, Andorra, expects a decline in city populations. In the US, the urban population will grow from 82.3% of the population up to 84.9% of the population.
An Atlanta market report for real estate explains why a global migration pattern like this is important. Atlanta is one of many cities where people want to live because of economic and job diversity, yet there is a housing shortage. The shortage is not just for affordable housing or starter homes. The shortage is affecting all housing segments.
The underlying demand to live in cities, especially certain cities is keeping demand strong, but this demand does not necessarily translate into home purchases for Millennials. According to Miles Deamer, Director of Investments at portfolio diversification company AlphaFlow,
“… strong job growth and low unemployment are giving Millennials the option to leave their family home sooner … This group then pushes toward dense urban centers where the price to purchase a first-time home is much more expensive, thus renting is the primary option. Across the nation, we are seeing Millennials migrate for good paying first-time jobs. Areas such as the Pacific Northwest are showing strong signs of economic growth, attracting recent college graduates …“
For more on the national trend, the National Association of Realtors (NAR) has been putting out an annual home buying/selling generational trends survey each year since 2013. Serious real estate investors should read it and you can download a free copy from the NAR site.
Here are some relevant points from the survey:
- 27% of all buyers reported having student debt with a median balance of $25,000. 46% of buyers 36 and younger – the Millennials – reported having student debt at the same $25,000 median balance.
- Stopping a 3-year declining trend, the share of home sales to first-time homebuyers increased to 35% of the market. The 2015 level of 32% was a 30-year low for first time home buying, while the long term average (per the NAR) is 40%.
- The median age of first-time buyers in 2016 is 32, the highest age since 2006, and their average income was higher as well. There’s an almost equal chance that the first-time home buyer in 2016 was a Gen X (37-51) than a Millennial.
- 13% of home buyers said that saving for the down payment was the most difficult part of the process. They admitted that having student debt made it more difficult to save.
- Millennials are the largest group of homebuyers in 2016, at 34% of the market, for the 4th year in a row. 66% of these buyers (~22% of the total market) are first-time buyers.
Millennials value buying a home, more than Generation X did at their ages. Millennials are buying when they can since they are the largest group of home buyers, but saving the down payment takes them longer. The increasing average age of the first-time home purchase comes from both Gen X buying and delayed Millennial buying. Sales to first-time home buyers have been on a consistent decline that troughed in 2015. Who knows if 2016 was the beginning of an uptrend or not.
There’s no doubt that student loan debt is a factor in delaying the first home purchase but thus far it has not been a big enough factor to hurt demand for home buying overall.