CBRE’s latest U.S. Multifamily Research Brief, Student Debt Woes Feed Multifamily Markets, focuses on how student debt is holding back many Americans from home buying, and prolonging their stay in apartments. But it held a pleasant surprise from a societal viewpoint.
“The percentage of students graduating with student debt is edging down,” Americas Head of Multifamily Research for CBRE|CBRE Research Jeanette I. Rice, told Multi-Housing News. “Everyone—apartment owners alike—would agree that it would be good for the country if the younger generation did not have to take out as much student debt to obtain an undergraduate and/or graduate degree.”
But even with the percentage of graduates with student debt inching lower, student debt will remain a headwind to home buying for a long time, Rice added. “It is not going away due to the high—and continuing rising—cost of higher education and the need to obtain undergraduate and often graduate degrees,” she said.
Home buying impact
The authors wrote the brief to quantify the extent of student debt, how widespread it is and how much impact it has on home buying. “The main takeaways were not surprising,” Rice said. “The industry is well aware student debt is holding back many from home buying.”
But the statistics “put an exclamation point on that story,” Rice observed, citing total student debt reached $1.5 trillion in 2019, a more than doubling of debt levels in 10 years. At graduation, 65 percent of 2018 college students held student debt. In 2019, average student debt per loan recipient grew to $35,000, or more than $8,000 more than average home down payments. Moreover, student debt is delaying home buying for about 60 percent of younger household home buyers.
After adjusting for inflation, the 2019 average cost of college tuition, fees and room and board were more than triple what they were in 1978, the brief reported. And higher education costs are anticipated to continue growing at rates greater than those of inflation.
An Apartment List survey last year found student debt-burdened college grads need about 12 years to save 20 percent for a down payment. For those in metropolitan areas with high housing costs like San Francisco, Denver and Austin, the average is 15.4 years.
“I research all sorts of factors influencing home buying, (including) demographics, lifestyle patterns (and) financial considerations,” Rice said. “Student debt is part of this larger story. They all suggest that home buying will be delayed for a few years compared to prior generations, or maybe deferred much longer. Of course, this is good news for multifamily demand. It also suggests a more permanent shift to a higher percentage of households remaining renters. Many other countries have higher percentages of renters than the U.S.”
The CBRE brief noted while college degrees will contribute to eventual higher earnings for Millennials and members of the Generation Z cohort, the debt they incurred in earning their sheepskins is preventing them in the near term from becoming homeowners.
Approximately a quarter of Millennial homebuyers cite saving for down payments as the most daunting aspect of the home buying process, according to the National Association of Realtors (NAR). Among younger homebuyers, debt was cited as the most significant road block to saving for down payments. High debt-to-income ratios are the most common reason for prospective homebuyers to be turned down for a mortgage, NAR reported.
Rising home prices and reduced inventories of lower-priced homes combined with high student debt give most Millennials little hope of purchasing homes in the near future. A negative for younger would-be homebuyers represents a plus for the multifamily housing industry, which over the past decade has seen sustained high levels of demand.