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Home Publications Blogs Beat the Press Weak Wage Growth Is Bigger Problem for Housing Market Than Student Debt

Weak Wage Growth Is Bigger Problem for Housing Market Than Student Debt

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Tuesday, 18 February 2014 07:51

The Washington Post had a somewhat confused front page piece claiming that student debt burdens are a major obstacle to the recovery of the housing market. First, it should be noted that by most measures the housing market has already recovered. Prices are above their trend levels. Sales are also at or above trend levels. Construction has not yet recovered, but this will not happen until the inventory of vacant housing units is further reduced.

However, the piece is seriously misleading in implying that student loan debt is a main factor impeding home buying. (Bizarrely, it discusses the situation of someone looking to buy an $800,000 home, four times the median house price.) While student loan debt undoubtedly does make it more difficult for people to buy homes, so do low wages. This is a much bigger problem for people without college degrees who have historically accounted for the vast majority of homeowners.

According to a recent study by Pew, the median 25-32 year-old with an associate degree earned $30,000 in 2012. Those with only a high school degree earned $28,000. Both are less in real terms than what they would have earned in 1979. If we assume that their mortgage payments and taxes should not exceed 30 percent of their gross income, this means that they cannot afford a house that costs more than $153,500, roughly 75 percent of the median house price. This assumes a 4.5 percent interest rate, a 20 percent down payment, and no need for mortgage insurance. If this were to rise to 5.5 percent, either due to higher interest rates or a need to get mortgage insurance, then they would only be able to afford a home costing $139,500.

The study showed the median high school grad earned $28,000, which means that in these cases the most expensive house they could afford would be $143,300 in the case of a 4.5 percent interest rate and $130,200 in the case of 5.5 percent interest rate. As a result, most young people without college degrees will not be earning enough money to buy a house. It is worth noting that the Pew study showed that the median wage of college grads has barely risen for the typical college grad over the last three decades also. They have also been victims of the upward redistribution during this period, although not quite to the same extent as those with less education.

Comments (8)Add Comment
Craig from Sunny San Leandro
written by Craig Williams, February 18, 2014 12:29
Tenants could create a serious union and shift the need for new housing as single unit private housing toward apartments.Wage come from a weak NLRB , a weak apprenticeship system , maybe too many retail jobs , global vision by corporate upper crust and global competition and the fact that Japan ate our lunch in many industries.On the other hand with brilliant technologies our robots can build housing for next to nothing .This might not make sense for the housing industry but it would be great for the general public. In a way housing is a "too big to fail" industry when calculated against brilliant technology and tenant well being.
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written by PeonInChief, February 18, 2014 1:43
In addition most tenants are unable to save for a down payment because they are paying so much in rent. More than half of all tenants pay more than 30% of their income for rent, so saving a down payment from a $28K income becomes nigh on impossible.
Pronouns Can Be Tricky
written by Ellen1910, February 18, 2014 2:23

". . . they cannot afford a house that costs more than $153,500 . . . ."

Does that mean a married couple, "he" and "she" both working, can afford a house that costs $307,000 -- that is, 150% of the median house price?
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written by LSTB, February 18, 2014 2:48
The New York Fed has a different take: "Young Student Loan Borrowers Retreat from Housing and Auto Markets" (http://libertystreeteconomics....rkets.html)

For one, the authors found that in 2012, for the first time (if in many, many years) non-student-loan debtors aged 30 were more likely to have mortgage debt than student-loan debtors the same age.



To be sure, there's been a collapse in young people's earnings, but now non-student debtors appear slightly better off. I see no reason why this trend won't continue.

As for this line:

First, it should be noted that by most measures the housing market has already recovered. Prices are above their trend levels. Sales are also at or above trend levels.


The homeownership rate is at a low going back to the 1990s, and young households (i.e. under 65) in particular are less likely to be homeowners than in the early '80s. (http://www.census.gov/housing/.../fig07.pdf)

The housing market has been buoyed temporarily, but it won't last. The "American dream" depends on young people having the purchasing power to buy out their elders to perpetuate the land Ponzi scheme. That's not happening anymore.
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written by LSTB, February 18, 2014 3:29
Dean, I'm also having a problem with your calculations because they assume that people are buying homes on one income. The mean quarterly median asking price nationwide last year was $142,250 (Table 11A/B (http://www.census.gov/housing/...ttabs.html)). A 20 percent down payment reduces that to $113,800. A $113,800 mortgage at 4.5% is shy of $7,000 annually. That's doable for a dual-income household nationwide. If you want to run these numbers for urban markets, then you have to use urban median incomes.

Two, I may be going out on a limb here, but first-time homebuyers are usually couples with their second kid. I'm not sure they typically purchase huge houses or condos.

Although depressed incomes are a bigger cause of housing market entry problems than student loan debt—to say nothing of low household formation rates—I don't think it's as dire for the reasons you've made it out to be.
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written by JimJ, February 18, 2014 4:55
If we assume that their mortgage payments and taxes should not exceed 30 percent of their gross income, this means that they cannot afford a house that costs more than $153,500, roughly 75 percent of the median house price.


It might help to be explicit that you're referring to the single college grad, as opposed to the high school grad, or a married couple containing one of each. (Later paragraphs at least suggest this, but ... be explicit right here, since you've just introduced a second person.)

It would probably also help to not assume a 20% down payment. After closing costs, that requires saving well over 1/4 the price, while paying rent elsewhere -- which is more common for buyers of step-up homes than for starter homes.

Also, if you do insist on assuming 20% down, then do you really mean a $153K mortgage, on a $190K house? For a single new graduate, that doesn't sound too limiting. (Of course, if interest rates go up at all, the situation quickly gets bad.)

And if you reduce the 30%-of-income possible payment by $500/month to cover student loans, then it does indeed become more difficult.


The study showed the median high school grad earned $28,000, which means that in these cases the most expensive house they could afford would be $143,300 in the case of a 4.5 percent interest rate and $130,200 in the case of 5.5 percent interest rate. As a result, most young people without college degrees will not be earning enough money to buy a house.


Where I live, there are plenty of starter homes for far less than that; whether a recent high school graduate can actually get a mortgage is a different question.
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written by Jayg, February 18, 2014 9:01
There are anedotes about this. I would think there are some private school grads with a significant amount of debt that couldnt afford a house without significant wage increases. The type that don't come early in careers outside consulting, tech, or finance. I think it is legit to consider education inflation and stagnant wages. I don't see how they cannot both be factors under some circumstances. You factor in childcare expenses, private school loans, and car payments then things can get tight for young families
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written by watermelonpunch, February 19, 2014 8:16
I think people misread the title of this blog post to read "student debt not a problem for anyone".

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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