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As the nation’s student loan debt quickly approaches $1 trillion, it’s no wonder why the low interest rates on home mortgages aren’t providing the expected boost in home sales that experts initially predicted.
Roshell Schenck, a Ph.D graduate with a degree in pharmacy currently earns an annual salary of six-digits, but can’t qualify for a home loan to provide shelter for her daughter and herself, reported Bloomberg. Despite the fact that she makes $125,000 a year, she has more than $110,000 in student loan debt, which is putting a real strain on her income and potential borrowing opportunities.
“I’d love to buy and can afford to buy,” Schenck told Bloomberg.
Willing and able borrowers seem to be a rarity these days, but it seems that even if borrowers have the desire and the funds to purchase a house, banks want little to do with borrowers if they have outstanding student loans.
Since loans used for education are being viewed with greater scrutiny than other types of outstanding financing, Schenck is unable to get approved. “It’s almost impossible for me to get a loan,” she explained. “My debt is crushing my chances of purchasing a home.”
The Trillion Dollar Mark
Because the demographic that makes up most of the “first-time” homebuyers tends to be of the younger generation, they often carry student loan payments. Graduates or not, this higher education financing has found commonplace amongst the nation’s new adults, but as banks are seeing defaults rise, they’re very wary about issuing mortgages to those indebted with these loans.
“Students coming out of college are burdened with more debt than traditionally they have been, and they are also coming into an economy that is underperforming previous recoveries,” said Rick Palacios, a senior analyst at John Burns Real Estate Consulting LLC in Irvine, CA, to Bloomberg. “These things pile on each other and tell us it’s not going to help the housing recovery right now.”
Particularly as the $1 trillion mark comes closer and closer, and experts are predicting a student loan bubble being formed.
“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and rtenders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” said John Rao, vice president of the National Association of Consumer Bankruptcy Attorneys, in a Bloomberg article.
Driving Away the Fix
But cautious or not, driving away first-time homebuyers from the mortgage market is crippling the housing world.
“Potential first-time homebuyers have been disproportionately affected by the very tight conditions in mortgage markets,” said Ben Bernanke at a homebuilders conference last week, according to Bloomberg. “First-time homebuyers are typically an important source of incremental housing demand, so their smaller presence in the market affects house prices and construction quite broadly.”
Despite the fact that current student loan borrowers are being turned away from the mortgage market, some remain optimistic.
“The dream feels like it’s farther out of reach than I ever thought it would be,” said Shenck. “[But still,] I haven’t given up hope of one day owning my own home.”
Home loan interest rates jumped this week to a high for 2013, according to Freddie Mac’s weekly survey.
For the week ending March 14, 2013, the 30-year fixed-rate mortgage (FRM) averaged 3.63 percent with an average 0.8 point, up from last week when it averaged 3.52 percent. A year ago, the 30-year FRM averaged 3.92 percent.
This week’s reading for the 30-year FRM was its highest since Aug. 23, 2012. It has increased, albeit on a fluctuating path, since reaching its record low of 3.31 percent on Nov. 21, 2012.
This week’s 15-year fixed-rate mortgage averaged 2.79 percent with a 0.8 point. The rate is up from last week’s average of 2.76 percent. Last year at this time, the 15-year fixed home loan interest rate averaged 3.16 percent.
“Fixed mortgage rates rose this week on stronger signs of jobs growth and consumer spending,” said Frank Nothaft, Freddie Mac vice president and chief economist.
The 5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 2.61 percent with a 0.6 point this week, down from last week when it averaged 2.63 percent. A year ago, the 5-year ARM averaged 2.83 percent.
The 1-year Treasury-indexed ARM averaged 2.64 percent with a 0.4 point. The rate is up from last week’s average of 2.63 percent. At this time last year, the rate averaged 2.79 percent.
According to the Bureau of Labor Statistics (BLS), the month of February experienced an addition of 236,000 new workers. This large economic addition helped to reduce the unemployment rate to 7.7 percent. The employment increase helped to offset the expiration of the payroll tax holiday.
In addition, retail sales increased 1.1 percent, significantly above the market consensus forecast.
Home loan interest rates continue their moderate changes seen last week according to rate reports supplied by loans.org.
Although this week’s interest rates changed more than last week, when two out of three rates remained the same, it was minimal. For the week leading up to Thanksgiving Day and ending on Nov. 27, 2013, the 30-year fixed rate mortgage averaged 4.16 percent. This rate was a small four-basis-point increase from one week prior.
The 15-year FRM made a similar gain, shifting from 3.11 percent to 3.15 percent this week.
The final home loan interest rate, the 5/1 adjustable-rate mortgage, increased only two basis points from 2.72 percent to 2.74 percent.
Even though the rates have stabilized in the past three weeks, there are still significant differences on a state-to-state basis. For example, an average mortgage loan on a $250,000 home in Idaho would cost less than it would cost in Ohio.
An average 30-year fixed mortgage in Idaho would be at a 4.13 percent interest rate. In comparison, the average home loan interest rate on a similar mortgage in Ohio is 4.27 percent.
Over the course of 30 years, a borrower in Idaho would repay a total of $436,446, whereas a borrower in Ohio would repay a total of $443,800.80. The small 14-basis-point difference would equate to a price difference of $7,354.80 over the course of a 30-year loan.
Beyond statewide differences, there are several factors impacting the housing market on a national scale including a negative existing home sales report, a slow holiday season and the addition of Janet Yellen at the Federal Reserve Bank of New York.
During October, total existing home sales fell 3.2 percent to a seasonally adjusted rate of 5.12 million according to the National Association of Realtors (NAR). Single-family home sales fared even worse, reducing 4.1 percent to an adjusted annual rate of 4.49 million. Despite the declines, both rates are higher than those posted one year prior.
Karyn Glubis, a realtor in the Florida area, is not surprised by the findings, stating that October is usually a slow month overall.
“Kids go back to school in September so people are staying put instead of moving,” she said but added that some buyers will return to the market in November. But any increase is likely to be minimal. Large shifts are uncommon from November to early January.
One final impact on the housing market is the change in command as Yellen takes over her position as Fed Chairman. Anytime a new chair changes, markets can be impacted according to Dan Gjeldum, senior vice president of mortgage lending at Guaranteed Rate.
The new leadership is expected to be positive for the housing industry, home loan interest rates and for consumers.
“Yellen is widely considered to be good for housing as she is of the belief that until the economy improves by the metrics put in place by the Fed, the Fed will not begin tapering their bond buying,” Gjeldum said.