Are Student Loans Holding Back Housing?

A lot of people seem pretty sure that student loans are behind a slow economy. Elizabeth Warren got there first. Then Vox posted a few charts confirming that, yes, those with student debt are less likely to own homes. Today I read that Larry Summers and Joe Stiglitz endorse this idea. Rick Rieder from BlackRock agrees. 

Let me play devil’s advocate.

The facts are clear – home ownership among those with student loan debt is decreasing much quicker than for those without.

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It is difficult to reach the conclusion, at least from this chart alone, that student loan debt decreases home ownership. For one, both lines are following the same trend over the same period of time, only one has a steeper slope since the financial crisis. Except this isn’t surprising, student debt is correlated with debt which is poison over a period of deflation (or lower than expected inflation). It is not unique to students.

But more importantly, those jumping at the correlation between student loans and home ownership over a few years of data are not paying enough attention to large, structural shifts in economic geography over the past fifty years. For nearly a century, suburban growth eclipsed urban. Millenials, the fraught group in question, are changing that. Two-thirds of young graduates now want to move to cities for a better job, compared to a fraction not too long ago. Not to mention the more than 80% that are willing to move to any city if needed.

Dad is no longer a company man, nor mom a housewife. Rather, graduates are likely to vie for shorter commitments focused on training and, in a number of cases, with a higher probability of relocation in the future. Not to mention the logistical, locational difficulty of maintaining a dual-income family (specifically outside of urban centers).

And that’s the demand side. Jobs that cater to college graduates are slowly disappearing from middle America toward coastal centers that capitalize on economies of scale and network effects. Vox notes that the age at which graduates first purchase a house is becoming later. True, but not necessarily relative to household formation itself – something happening later across the country driven by graduates. (Not to mention, as a commenter on Twitter mentions, the increasing necessity of a post-Baccalaureate degree).

Here’s the thing about those with “student debt” – they are much more likely to be “students” than those “without student debt”. In the latter group, you either don’t have a degree – in which case none of the above qualifications apply – or you’re wealthy enough to go through college without any debt. Neither is a representative group.

The bottom line is students increasingly want to live in areas where homeownership is unaffordable. (And it’s not like twenty-somethings even should be able to afford a place in New York City). There is increasing evidence that homeownership is probably not the best investment for many people. The returns on real estate are dwarfed by the stock market, and other carefully-orchestrated investment plans, especially without the (clearly excessive) boom years of the past decade. Maybe millenials are paying more attention and making smarter investments.

Of course, jubilees are almost always a good thing (and it’s not clear that lower rates as Elizabeth Warren wants, would even achieve lower debt – it may just encourage poorer people, or those who otherwise would not have, to borrow more). Deleveraging, especially in a time of low inflation, will improve the economy through simple wealth effects and encourage capital formation via higher savings rate (and perhaps investment in domestic equity).

But it does not strike me as a particularly equitable, or necessarily economically-optimal, use of our budget to help those who were, are, or would-be students. Or, in other words, near the top of the income distribution. An expansion of the EITC with the same money would be more equitable, more directly encourage job creation, and give more bang for the buck.

Of course, the best thing for debtors and the economy would be a inflation above expectations.

 

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4 comments
  1. Excellent. This is one of those things that gets pulled into the zeitgeist on the flimsiest of evidence. Thanks for the needed push-back.

  2. Bob said:

    We don’t WANT to live in areas where housing is unaffordable. I grew up in the rural Midwest, and I would love to go back there more than anything. But, there are NO jobs there. I have no choice but to live 1800 miles away. I wish Midwestern states would give large tech companies the same kinds of tax benefits that west coast states do so that there were more jobs there.

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