There is a lot of talk these days about the impending student loan crisis and how that could impact the overall economy and how seemingly exorbitant student loan debt nationally has impacted the housing market. I personally know more than a few who have moved back in with their parents to save money to buy a house, citing high rent and a pile of student loan debt. Nobody really wants to move back in with their parents as an employed adult trying to build a career, friendships and relationships so I’m going to assume that moving back in with your parents is the least favorite option and because student loan debt has to be paid, not paying rent is the best option for this group.
After a quick search, I found two articles published within about a month of one another published by the same news outlet with opposite findings.
Student debt is actually not holding back the housing market, says economist
and, one month later…
Student loan debt is hurting the housing market, survey finds
The major difference between these two articles is that one is driven by the research of an economist (Student debt is actually not holding back the housing market, says economist) and the other is based off a survey of millennials (Student loan debt is hurting the housing market).
It’s important to give our current housing prices a little context. The Case-Shiller Home Price Index is a barometer for housing prices throughout the US. I chose about a ten year timeline to go back to just before the Great Recession. That was the infamous financial bubble that burst.
Two things pop out on this chart. One, prices began to fall well before the official announcement of the Great Recession in 2008 and two, as of December of 2016, housing prices are already well past what they were a year or so before the Great Recession. (Completely unrelated, there’s a pretty strong swing of about 1% every summer in housing prices – so buying and selling real estate is likely seasonal and depending on what you’re trying to do, keeping that in mind might be worth thousands!)
This chart really shows that real estate prices have recovered, which means there’s enough buyers out there for prices, despite record high levels of student debt. Prices also don’t appear to be slowing down, and they’ve been on a fairly consistent up-tick since 2012. It would appear that the University of Michigan economist professor Susan Dynarski is right, that student loan debt isn’t holding back the real estate market.
According to the St Louis Fed, Student Loan Debt has, and continues, to be on a steady uptick. This doesn’t mean student loan debt isn’t effecting the market, it just means that there isn’t a strong correlation between student loan debt and the swing in housing prices. However, there could be some legislative changes that change how people manage their money.
After the financial crisis, there were a few interesting rules specific to student debt repayments and mortgage lending practices. Below is a summary of those rules that I think might apply:
- July 21, 2010 – Dodd-Frank Wall Street Reform and Consumer Protection Act
- March, 21, 2010 – Health Care and Education Reconciliation Act of 2010
- December 21, 2012 – Pay As You Earn (PAYE) Program
This is by far not an exhaustive list, but, it does hint at what the federal government was thinking at the time. Unemployment in 2010 was around 10% (compared with 4.7% in December of 2016) and GDP growth hovered around the 1% range. Student loan debt was higher than it had ever been, and something had to be done.
The Health Care and Education Reconciliation Act of 2010 and the PAYE rule explicitly limit the burden of existing student loan debt and the Consumer Protection Bureau (created by the Consumer Protection Act) limited how much you could borrow based on your income.
In the chart below you can find when the rules/laws were passed, when they took effect and how the overall housing market response
Looking at this chart, it appears that there isn’t a strong correlation between rules easing the pain of student loan debt and home ownership. One reason could be that there could be significant lag between implementation and economic effect. But this doesn’t make sense either because the increase in housing prices in 2012 couldn’t possibly be because people foresaw new student loan rules coming in 2014 (although they were part of the Health Care and Education Reconciliation Act of 2010).
If new student loan rules aren’t driving home prices, then there must be something else – something more on a macro level that I completely missed. I asked one of my accounting friends and the answer was pretty obvious: quantitative easing.
Quantitative easing is very close to printing new money, but instead of dropping dollars from helicopters a central bank purchases financial assets. The reason a central bank uses quantitative easing is because the normal lever to boost the economy, reducing interest rates, is no longer available because interest rates are already at zero. Quantitative easing fixes that problem by buying financial assets, increasing the money supply and (in theory) boosting the economy (Investopedia has a much more detailed explanation here).
After the financial crisis, the US Federal Reserve Bank completed three rounds of quantitative easing and one twist to try and drive inflation and boost the economy. Below is what they did:
- Announced November 2008: Purchased $100 billion of agency debt, $500 billion of mortgage backed securities
- Announced March 2009: Purchased $1.25 trillion of mortgage backed securities, $200 billion in agency debt and $300 billion of longer term tresury securities
- QE2 – Announced November 2010: Purchased $600 billion of longer term treasury securities
- Operation Twist (Maturity Extension Program)
- Announced September 2011: Purchased $400 billion of long term treasury securities and sell $400 billion of short term securities
- Announced in June 2012: Purchased long term securities that mature in 6 – 30 years, sell same value of short term securities
- Announced September 2012: Purchased agency mortgage backed securities at $40 billion per month and twist until year end, increasing longer term securities by $85 billion
- Announced December 2012: Purchased agency mortgage backed securities at a pace of $40 billion per month and longer term Treasury securities initially at a pace of $45 billion per month after twist ends year end
QE was a way for the Federal Reserve to directly purchase mortgage backed securities, providing capital and increasing the money supply. Below is the same chart with the QE/Twist events include
This chart about sums up what drives housing prices, consumer credit, driven by money supply, supported by Federal Reserve policies. Student loan debt, however, doesn’t appear to correlate with house prices.
What does this all mean? Real estate prices are driven by money supply. Federal Reserve policies will have a much larger effect on home prices than student loan debt, and this is something we should all pay attention to as interest rates begin to rebound.
This doesn’t mean that student loan debt isn’t a problem, it just means that student loan debt probably isn’t affecting the real estate market nearly as much as we think it does.