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February 18 2014

Locked Out

Patrice J. Lee

Millions of young Americans are struggling with repaying their student loan debt. That struggle is keeping them from achieving a major milestone and boosting the economy: buying a house.

We’ve reported on a failure to launch among Millennials; millions of young people are still living at home with parents. This generation faces a sixteen percent effective unemployment rate and almost two million of us have dropped out the job market. Student loan debt and costs associated with ObamaCare compound our hardship. Because we struggle to establish our careers and set our feet on sure financial footing, we are locked out of home ownership.

The housing market has seen improvement over recent years driven by investors who purchased houses. Demand is waning and will continue to drop if first-time home buyers don’t step up. However, they can’t because their student loan debt eats up so much of their income and their debt-to-income ratios excludes them from securing loans.  Housing industry officials are ringing an alarm that, if this trend continues, the housing market will suffer and so will the broader economy which relies on the housing market for growth.

Individual responsibility plays a role as many young people chose to finance their college and post-grad educations with federal and private loans. Government policies also played a role at both the front and back ends.

The Washington Post reports:

An analysis by the Mortgage Bankers Association found that loan applications for home purchases have slipped nearly 20 percent in the past four months compared with the same period a year earlier.

First-time buyers, the bedrock of the housing market, are not stepping up to fill the void. They have accounted for nearly a third of home purchases over the past year, well below the historical norm, industry figures show. The trend has alarmed some housing experts, who suspect that student loan debt is partly to blame. That debt has tripled from a decade earlier, to more than $1 trillion, while wages for young college graduates have dropped.

The fear is that many young adults can no longer save for a down payment or qualify for a mortgage, impeding the housing market and the overall economy, which relies heavily on the housing sector for growth, regulators and mortgage industry experts said.

The lending climate has become less forgiving for those carrying student debt, and that’s unlikely to change anytime soon.

Federal rules that took effect last month grant mortgage lenders broad legal protections as long as they do not approve loans for prospective buyers whose total monthly debt exceeds 43 percent of their monthly gross income. The overarching goal is to protect borrowers against lender abuses.

But the rules could also make it difficult for some buyers with student loans to obtain a mortgage…

 “This change can affect a wide range of people with student debt. Graduate students, law students or even parents who’ve taken on their kids’ student loan debt,” [a vice president at First Heritage Mortgage in Fairfax, Phil] Denfeld said.

Several forces are at work. First, young people are feeding bigger chunks of their income toward debt repayment, which makes stashing away cash for down payments much harder.

Second, young people have higher thresholds to jump thanks to new federal regulations. While it’s responsible to set rules that impede the reckless borrowing which drove the last housing bubble, it’s irrational to be so overly cautious that solid potential borrowers are kept out.

Third, the accessibility of student loans with interest rates artificially held down thanks to Congress has encouraged universities and colleges to raise the costs of education which in turn raises demand for loans to pay for schooling. We are all familiar with this vicious cycle that is driving what some expect will become a lending bubble.

If Congress were to allow student loan rates to rise to market levels, prospective students would be discouraged from taking out more loan debt than they could repay and would be forced to attend schools that are within their budgets. Schools would eventually have to adjust their costs to a reality of less guaranteed federal student loan funding.

Promoting policies that hinder economic growth (like ObamaCare) also do nothing to generate jobs that allow us to repay our debt and move up in our careers.

Government is playing a nefarious role that may be well-intentioned but has rippling impacts over the lives of young Americans.  Politicians pretend to care about our young generation, but enabling behavior that incentivizes bad choices gives us a sweet pill with bitter long-term effects.

Independent Women’s Forum’s mission is to improve the lives of Americans by increasing the number of women who value free markets and personal liberty. Sister organization of Independent Women’s Voice.
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