GUEST VIEWPOINT: Homeownership—Student Debt and a Mismatch Between Supply and Demand

Joe Czajka | February 2, 2021

Joe Czajka

This week, the quarterly “Pattern for Progress Housing Update” is being released, which will provide an analysis of the residential real estate market of 2020. As many of us know, no matter what field we are in, the residential real estate market skyrocketed in 2020 as interest rates dropped and the housing inventory declined. Simultaneously the region witnessed an influx of buyers from New York City looking to buy a home quickly, as the fears of the pandemic drove people from the dense urban core of the city to the suburbs of the Hudson Valley. The convergence of these factors rapidly showed a supply and demand issue for the Hudson Valley.

Simple economics tells us with limited supply and high demand—prices go up. With rising prices, affordability of homeownership becomes more difficult, especially for first-time buyers. Many of those first-time buyers are the generations known as Gen Z and the Millennials and their rising student debt plays a major role in their ability to purchase a home and therefore in the housing market.

As you read through the following analysis, please keep in mind this blog does not suggest that a higher education is not worth the investment, nor is it suggesting that every graduating senior is ready for homeownership. The purchase of a home takes time and financial stability. I am simply pointing out that student debt most definitely hampers the ability to save for a down payment and closing costs for the purchase of a home.

Student Debt

An education is said to be an investment that lasts a lifetime.

Statistics show that earnings are dramatically higher with a bachelor’s degree and even higher with a master’s degree. However, those earnings are increasingly realized on a delayed timetable. In other words—it takes a longer time to reach a high annual salary. Very few graduates start their career with a six-figure offer.

Many of today’s graduates leave college with enormous student debt and face an economy that is on shaky ground at best. On the national level, total federal student loan debt has now topped $1.7 trillion, and is the second largest source of household debt next to mortgages.

• Average student loan debt in New York State = $37,000 (many are over $50,000).

• Amortize the average loan over 10 years=$37,000 @ 7% interest = monthly payment of approximately $430.

• Today’s economy does not support the repayment.

Let’s Look at the Numbers

This is going to get a little wonky, but please bear with me as I walk you through a possible scenario.

To qualify for a mortgage, typical underwriting requires the borrower meet two basic thresholds:

1. The borrower’s housing debt to income ratio cannot exceed 28% of gross income. The housing debt includes the principal, interest, taxes and insurance (PITI).

2. Total debt to income ratio, is typically set at 43%. In other words, the borrower cannot have recurring monthly debt payments, including a car(s), personal loans, student loans and PITI that exceeds 43% of gross income.

For purposes of this illustration, we are assuming a two-person household and using the median household income for Orange County ($80,000 or $6,700 monthly). We are also using standard underwriting guidelines for a 30-year, fixed rate mortgage at 3.25% with the assumption of a 5% down payment. These standards also include the 28% and 43% ratios as described in the thresholds above.

Threshold 1- Housing to Income Debt Ratio – Allowable Housing Costs:

Monthly Gross Income x 28% = amount for monthly housing debt (PITI).

$6,700 x 28% = $1,875 for housing.

Threshold 2- Total Debt to Income Ratio – Allowable Other Monthly Debts:

Monthly Gross Income x 43% = maximum allowable amount for all monthly debts such as student loans, car loans and other personal loans including the PITI.

$6,700 x 43% = $2,880

$2,880 – $1,875 = $1,005 the amount for other monthly debts (car, loans, etc.)

Now let’s assume the following:

• Total monthly student debt for both borrowers = $600.

• The average monthly car payment in the U.S. is $550 for new vehicles, $393 for used and $452 for a lease. If each of the borrowers has a used car, the monthly car debt = $786 ($393 x 2)

• The student loans ($600) + the car loans ($786) = $1,386 per month.

• Using the calculations above, which would allow for $1,005 for other debts the total monthly debt, the debt is too high for the purchase of a median priced home in Orange County of $300,000.

Add to this scenario that the borrowers would need $33,000 for the down payment and closing costs.

Simply put – the median annual median income of $80,000 is not enough for the purchase of the median priced home.

So, What Can They Buy?

Without showing all the math—an annual median income of $80,000 with $1,386 of other recurring monthly debt can carry a mortgage of $175,000.

A quick look at the current inventory of homes for sale in Orange County shows there are 740 homes on the market. Only 57 of them are priced below $175,000 and the average age of those homes is over 100 years old. There is a good chance that these homes will likely need major system replacements and renovations, which can easily top $25,000.

This scenario is only one out of dozens—and not everyone has student debt. However, in order for the region to be competitive in attracting and retaining young adults—there must be a sufficient supply of homes priced for young families. I completely understand and agree that people need to manage their own expectations when looking for their first home. Homeownership does not happen overnight and sound financial decisions are part of the calculus.

The Key Takeaway – There is a mismatch between the existing inventory of homes, including the new residential developments.

Solutions? Here are Several Possibilities for Thought:

1. Develop small homes – approximately 1,200 to 1,400 square feet on small lots and utilize Cluster Development to reduce costs and encourage open spaces.

2. Build super energy efficient homes including geothermal systems, solar panels and high efficiency appliances to reduce monthly utility costs.

3. Streamline the local approval process to reduce development costs.

4. Establish a set-aside to include the development of affordable homes.

5. Municipalities can opt into the five-year property tax phase-in (NYS ORPS Section 457) for first-time homebuyers to allow young buyers to build equity while reducing the initial tax burden.

6. Establish a Community Land Trust and Shared Equity models for homeownership.

7. Create Employer Assisted Housing programs—to assist first-time homebuyers enter the market.

8. Update local zoning and codes to allow for Accessory Dwelling Units and two-family homes as a way to create a revenue stream to augment income for the buyer.

9. Encourage and support housing organizations to secure state and federal grants for down payment and closing costs for home buyers.

10. Support and expand Financial Education and Homeownership Counseling programs

One last thought—a Bachelor’s Degree is a worthwhile investment. However, there are also a number of degrees and professional certificate programs available through the region’s community colleges that should not be overlooked. Furthermore, there are also apprenticeship and technical training schools available for various trades, which offer a terrific pathway to a number of professions. These programs may require less financial investment than a Bachelor’s Degree, however, there will likely be far less long-term debt. It is critical for the region to have a balanced workforce for a healthy and sustainable economy.

These ideas are just meant to get you thinking about creating other pathways to homeownership—we would love to hear yours.

Joe Czajka
Joe Czajka is Senior Vice President for Research, Development, & Community Planning, Hudson Valley Pattern for Progress and Executive Director, Center for Housing Solutions and Community Initiatives.