Roshell Schenck has a PhD in
pharmacy and earns $125,000 a year, yet can’t qualify for a
mortgage for a house for herself and her 9-year-old daughter.
The 2008 graduate of Lake Erie College of Osteopathic Medicine,
in Erie, Pennsylvania, has more than $110,000 in student debt.
“I’d love to buy and can afford to buy,” said Schenck,
28. Since lenders place closer scrutiny on college loans than in
prior years, she says, “it’s almost impossible for me to get a
loan. My debt is crushing my chances of purchasing a home.”
As outstanding student debt approaches $1 trillion, it’s
one more reason record-low interest rates aren’t doing more to
boost housing. The tighter lending standards that have emerged
in the wake of the recession weigh particularly on younger,
first-time home buyers, according to a Federal Reserve study
sent to Congress on Jan. 4. These households tend to be younger,
often have relatively new credit profiles, lower-than-average
credit scores and fewer economic resources to make a large down
payment, the report said.
“Potential first-time homebuyers have been
disproportionately affected by the very tight conditions in
mortgage markets,” Federal Reserve Chairman Ben S. Bernanke
said at a homebuilders conference last week. “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.”
The Fed’s white paper said 9 percent of 29- to 34-year-olds
got a first-time mortgage between 2009 and 2011, compared with
17 percent 10 years earlier. “These data suggest a large
decline in mortgage borrowing by potential first-time homebuyers
due to not only weaker housing demand, but also the effect of
tighter credit conditions,” the Fed said.
Outstanding education debt surpassed credit-card debt last
year for the first time, according to Mark Kantrowitz, publisher
of FinAid.org, a student loan website. Recent college graduates
carry an average debt load of more $25,000 each, which can limit
their ability to qualify for mortgages even if they’re fortunate
enough to land a job in a market with an unemployment rate of 9
percent for 25 to 34 year-olds.
Calling it a “student-loan debt bomb,” the National
Association of Consumer Bankruptcy Attorneys warned Feb. 7 about
the effects of rising student debt on recent graduates, parents
who cosigned their loans and older Americans who have gone back
to school for job training.
‘Drag on the Economy’
“Just as the housing bubble created a mortgage debt
overhang that absorbs the income of consumers and renders 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,” John Rao, vice president of the NACBA, said on a
People age 25 to 34 made up 27 percent of all home buyers
in 2011, the lowest in the last decade and compared with 33
percent in 2001, according to the National Association of
Realtors. At the same time, first-time buyers last year
accounted for 37 percent of all purchases, the lowest since
2006, when home prices peaked and the housing boom was showing
“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, California. “These things pile on
each other and tell us it’s not going to help the housing
recovery right now.”
Industry analysts including Robert Shiller of Yale
University have said housing prices may fall for a sixth year.
That in turn may weigh on consumer spending and hobble an
economy starting to show some signs of strength.
“The state of the housing sector has been a key impediment
to a faster recovery,” Bernanke told the National Association
of Homebuilders International Builders’ Show in Orlando,
Florida, on Feb. 10. He reiterated comments made at a press
conference in Washington on Jan. 25 after the Federal Open
Market Committee announced it would hold its benchmark lending
rate near zero until at least late 2014, extending its target
This latest stimulus step was intended “to convey to the
market the extent to which there is support on the committee for
maintaining rates at a low level for a significant time,”
Bernanke said at the press conference.
In September, the Fed announced plans to replace $400
billion of short-term debt in its portfolio with longer-term
Treasuries in an effort to lower borrowing costs even more. The
moves followed two rounds of large-scale asset purchases
totaling $2.3 trillion that ended last June.
Record-low mortgage rates haven’t revived housing sales
enough to spur the economic recovery. The average 30-year fixed
rate mortgage was 3.87 percent as of Feb. 9, according to a
Freddie Mac index, the lowest in data going back 40 years.
Before the recession, Americans were able to borrow against
the ballooning prices of their homes to fund spending on
education as well as cars, vacations and startup businesses. As
home prices have tumbled, more Americans find themselves
“underwater,” or owing more on their mortgage than the value
of their home, and with no home equity to borrow against.
“Homeowners who are underwater on their mortgages cannot
tap home equity to pay for emergency health expenses or their
children’s college educations,” Bernanke said last week.
Palacios, who published research in December on student
debt and housing, says first-time buyers are key to a housing
recovery because they enable current owners to move into larger,
pricier homes. “Move-up buyers need somebody to purchase their
homes to move,” he said in a telephone interview. “You need
that first leg in the recovery to materialize.”
While the economy emerged from its 18-month slump in June
2009, housing continues to struggle even as home-builder
confidence and existing sales picked up in the last quarter of
Single-family starts fell last year while multifamily
housing construction surged as more Americans became renters.
That should continue to boost apartment real estate investment
trusts, said Palacios. Equity Residential (EQR) is among them, up more
than 240 percent from its March 2009 low. AvalonBay Communities
Inc. (AVB) is up 230 percent.
New home sales and starts of single-family homes in 2011
were the lowest since 1963. Existing home sales for all of 2011
were up only 3.6 percent from their 2008 recession-trough, which
was the lowest for a full year since 1995. Sales of distressed
homes, including foreclosures, accounted for about a third of
existing home sales last year, according to the realtors group.
Not a Priority
Prices are down about 33 percent from their 2006 peak,
according to SP-Case Shiller (SPCS20) data, and most experts expect
further declines. Patrick Newport, who covers housing for IHS
Global Insight in Lexington, Massachusetts, sees prices falling
another 5 to 10 percent nationwide.
People age 25 to 34 accounted for 52 percent of first-time
buyers last year, near the average since 2005, according to the
Realtors group. Still, almost 6 million Americans in that group
were living with their parents in 2011, up from 4.7 million when
the recession began in 2007, according to Census data.
Buying a home is not high on Marie Casteel’s priority list.
She graduated from the University of Cincinnati in May with a
law degree and $120,000 in debt.
She’s deferred most student debt payments while she begins
a job as a family attorney that she says should pay about
$45,000 a year. Once her full re-payment schedule kicks in early
next year, she expects to be paying about $1,500 a month.
“I wouldn’t be looking at jumping into another $100,000 of
debt to own a home,” said the 31-year-old single mother. “I
don’t think jumping into home ownership would be financially
Still, once the youthful Americans coping with debt and
high unemployment finally emerge from under those loads, that
group should take the lead in a housing recovery, said Palacios.
“Once you start seeing that segment of the population
start jumping into the home-purchase choice, it’ll be a good
indication of normality returning to the market,” he said.
For her part, Schenck, the pharmacy PhD who is now living
in Waterford, Pennsylvania, and working as a pharmacy manager
for a grocery chain, still wants to buy at some point. She’s
trying to build enough savings for a larger down payment, to
increase her chances of getting a mortgage.
“I haven’t given up hope of one day owning my own home,”
said. Still, “the dream feels like it’s farther out of reach
than I ever thought it would be.”
To contact the reporters on this story:
Robert Willis in Washington at
To contact the editors responsible for this story:
Chris Wellisz at
Rob Urban at