When It Comes To Housing, ‘Affordability’ Is A Slippery Term

BLOG VIEW: RealtyTrac has a new report out which suggests that although student loan debt is at an all-time high, recent college graduates with median household income and median loan debt could, in theory, still afford a median-priced house in 96% of U.S. markets.

‘Contrary to much rampant speculation that student loan debt is holding back homeownership among recent graduates, we found that the vast majority of markets are affordable for recent graduates making the median household income – even many of those recent graduates with student loans,’ says Daren Blomquist, vice president at RealtyTrac, in a release.

Blomquist concedes, however, that, ‘student loans still represent a significant handicap for recent graduates in terms of the minimum income needed to buy a median-priced home. Nationwide, recent graduates with student loans need to earn 34 percent more ($8,969) than recent graduates without student loans to be able to afford a median-priced home.’

The report's findings are based on certain assumptions – for example, for homeownership, it assumes a 43% debt-to-income (DTI) ratio (including taxes and insurance); a 20% down payment; and a 30-year loan with a 4.13% fixed interest rate.

RealtyTrac arrives at average student loan debt by state using data from the Institute for College Access & Success (ICAS). That report puts the average amount of student loan debt per recent graduate at about $27,850, nationwide.

In my opinion, using the average amount of debt per student per state doesn't really make sense since student loan debt isn't geographically specific. For example, a recent graduate could live in rural Iowa, where housing is relatively affordable, yet if they attended an Ivy League school in Boston, they could have student loan debt that is far above the national average. Not only do students go to universities all over the place, the number attending college can vary greatly from year to year. My point is that the average amount of student loan debt per metropolitan statistical area (MSA) or state is a more volatile number compared to average household income, yet for the report's purposes, the two are held in relation.

RealtyTrac also conveniently omits the percentage of recent graduates who are actually making the median income for any given metropolitan statistical area (MSA). If, for example, only 5% of recent graduates (that is, if they graduated) are making the specified median income in any given MSA, they are hardly going to make a significant impact on sales, so what's the point?

The report arrives at average household income needed to buy a median-priced home using data from the U.S. Census Bureau. However, I just want to point out that a high percentage of recent college graduates live at home with their parents. I see this as a major factor in determining affordability, yet it isn't addressed in RealtyTrac's report. Obviously, student loan debt becomes much less of a hindrance if a recent graduate is able to live at home and save for several years before making a purchase.

States where student loans represent the biggest hindrance to affordability include Michigan, Ohio, Pennsylvania, Iowa and Alabama. States where student loan debt had the least impact on affordability included California, New York, Virginia, Massachusetts and Wyoming.

Of the 494 MSAs analyzed, there were 12 where the median income was not enough to buy a home, even without student loan debt. Among them were San Francisco County, New York County; Kings County, N.Y.; San Mateo County, Calif.; and Marin County, Calif.

What's more, there were only seven counties where student loan debt would ‘make or break’ affordability, including San Diego County, Calif.; Westchester County, N.Y.; and Sonoma, Monterey, San Luis Obispo, Yolo and Napa counties, all in California.

In the remaining 475 MSAs, recent graduates with median income and median loan debt could still afford a median-priced house, RealtyTrac says. Never mind the fact that stricter lending standards would preclude a high percentage of these recent graduates from obtaining an mortgage.

I'll leave off with this final thought: According to the U.S. Bureau of Labor Statistics, workers aged 20 to 24 earned an average gross income of about $25,000 per year, nationwide, in the second quarter of this year. Granted, only a percentage of them are college graduates, but taking into consideration the average amount of student loan debt was $27,000, a 43% DTI, taxes, cost of living and everything else, it seems highly implausible to me that a recent grad would have enough income leftover to cover mortgage payments on a median-priced home in 96% of U.S. markets. How many of these people are out there, anyway?

In my view, the problem isn't whether median-priced homes are affordable to recent graduates with median incomes, it is that only a small percentage of recent graduates are actually earning the median income needed to buy a home.

(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)


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