The Housing Downturn: the Result of a Generation Gap?
A recent report by the NAR has been used to blame part of the housing crisis on age demographics. 
According to this theory the housing market slowed down all of a sudden because the drop in the birth rate after 1973 created a sudden shortage of first-time buyers around 2006, when the housing began slowing rapidly in many areas.
According to this theory, the problem is just that there are not enough buyers coming of age to purchase the existing housing inventory. The supposed good news is that, during the downturn, the average age of first--time home buyers has dropped back down to 30, and the next generation is coming of now in time to buy. “Generation Y”’ is larger than the previous generation, due to birth rates starting and continuing to rise after 1980, so there will be more buyers coming of age as they are just beginning to reach their 30s.
So, Isn't It Time for Them To Start Buying and Fix the Market?
The problem is that this hope for Generation Y to jump in and start buying its way through the housing inventory may be unfounded. Even though numbers of first-time buyers were up in 2009 and 2010, many of these buyers were buying vacant foreclosure properties. This foreclosure buying does not really stimulate the market, because there are no owners to move up the “property ladder” into a new home (I am assuming that the vast majority of homeowners who were foreclosed upon were not able to secure a new mortgage, and are now renting or living with family or friends).
Another problem is that this generation is starting out strapped for cash. There have been many news reports and “exposés” on college student students and credit card debt, and laws have even been passed which are supposed to protect students from themselves. One thing that the media remains silent on, however, is student loan debt. In June 2010, student loan debt surpassed credit card debt for the first time in history. As of this writing, US student loan debt is approximately $905.5 billion, while credit card debt is $800.5 billion.
Even while reports were all over the media about the US's rising economic troubles, the government, financial advisers, and school counselors were encouraging students to take out higher and higher loans. The cost of a college education rose 400% from 1982 to the present day, but most people still view borrowing to finance and education as "good debt" and the easily availability of loans, coupled with promises of a higher paying job at graduation, led many students to view them as "easy money"'.
How Bad Is Student Loan Debt Among Generation Y?
Consumers seem to be wizening up about credit cards and reducing or eliminating those debts, but student loan debt continues to grow, and will likely be a bigger issue for this rising generation than for “Generation X” and those who proceeded it. The reason for this is that more students are going to college than ever before, and are relying heavily on loans, with no real plans for repaying them other than “graduate and get a job”. What many are finding now is that, if they can get a job, the student loan payments may eat up 30% or more of their salary; many students have to move back in with their parents just to make ends meet.
One study found that 75% of college graduates with student loan debt said that the loan payments have prevented them from buying a home or a car. Approximately 20% of all student loans are in default, which destroys a credit rating, and an additional 23% of borrowers are keeping default and delinquency at bay by using deferment or forbearance to postpone loan payments, at the cost of higher interest and longer loan terms. With student loans taking up to 25 years to repay, being almost impossible to discharge in a bankruptcy, and even able to keep a graduate from renewing their professional license, this seems to indicate a potentially long-lasting problem.
So, What Does This Have To Do With the Housing Market?
Any increase in the numbers of potential buyers in this generation may be offset by the student loan debt which has damaged many of their credit histories and drastically reduced their ability to buy. I have seen it happen with both friends and clients already – they are in their 20s or 30s, ready and willing to buy a home, but unable to get approved for a mortgage because their student loan debt takes up too much of their income or because they have already missed payments on the loan and damaged their credit.
I may be proven wrong over the next 5-10 years, but my prediction is that many of the generation that some are hoping will buy us out of the housing slump are simply unable to buy.
At least for the foreseeable future, it seems more likely that this generation will be more for moving back home with their parents and then becoming long-term renters than for creating a boom of young homeowners.
All images used by permission: renjith krishnan, Ambro, scottchan, & graur razvan ionut / FreeDigitalPhotos.net
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