For College Grads, Debt Significantly Delays First Home

In 2008, home sales in Cincinnati fell over 15 percent behind last year's numbers,
and the average home price in our region is down more than 5 percent compared to
2007 values. An expanded menu of mortgage options, relatively low interest rates
and relaxed down payment conditions by lenders have allowed for home purchases
by various previously underserved groups, including young people. However, it is
evident that many individuals who purchased homes during this period, have
struggled to pay their mortgages and are facing foreclosure.
For recent college grads, affording their first home may be even tougher because of
their accumulated debt. During 2003, young individuals, ages 23 to 32, responded to
their increased debt burdens by delaying home purchases. The recent research study
by Dr. Jennifer Pitzer, a Research Associate at the Economics Center, indicates that
every additional $1,000 of educational debt that an individual has incurred decreases
the probability of homeownership by about 0.5 percent. While this number may
seem small, consider that the average educational debt of a recent college graduate
is anywhere from $20,000 to $40,000. Thus, the average graduate with debt is
about 10 to 20 percent less likely to own a home after graduation than an individual
who did not attend college.
Given the increased levels of educational debts, the first-time home purchase
behavior of young college grads is changing. Since young people generally have less
wealth than older individuals it is more difficult for them to make down payments
and obtain favorable mortgage conditions to purchase a home.
The cost of attaining a college education financed with debt may offset some of the
individual gains of college education, at least temporarily. A decrease in purchases
by young college graduates may ripple through the economy. Currently, the National
Association of Realtors reports that while home prices have fallen, the inventory of
homes for sale on the market has risen. Homes are more affordable because there
are more available, but it is not clear that home prices have decreased sufficiently to
allow first time home buyers with debt to purchase them more easily. In addition, in
a healthier lending market young buyers were choosing to delay purchasing their
first home until they paid down their college debt. Today, lending conditions are
difficult for all but the most highly qualified buyers, which could limit access to
mortgages for low-wealth, indebted young college grads. This voluntary delay in
homeownership coupled with reduced access to financing could further slow the
stabilization of the housing market due to the more gradual entry of new buyers.