Student Loan Debt and the Homeownership Dream: Does The Former Torpedo The Latter?

Little more than a third of all Americans less than 35 years of age now own homes -- 35.9 percent, to be precise -- the lowest share since the government began tracking such numbers more than two decades ago. At the same time, Americans are confronting a mountain of student loan debt, some $1.2 trillion.

Economists are growing concerned that -- at least among those facing the highest levels of debt -- those two realities are connected. That dynamic that could sap vigor from the economy for years to come.

"It's critical to the macroeconomy to have a liquid housing finance system and a home buying market,” said Jared Bernstein, a senior fellow at the Center on Budget and Policy Priorities. "Residential investment is a small but very cyclical part of GDP growth. And without the ability of homebuyers to meet their demands, there’s a constraint on growth coming out of recession that has been pretty evident in recent months.”

A Goldman Sachs report on the millennial generation and the housing market -- reported by the Washington Post's Wonkblog -- finds those grappling with more than $50,000 in student loan debt or payments that exceed more than 5 percent of their monthly income are significantly less likely to buy a home than their peers.

The good news: "Small to moderate amounts of student loans do not appear to reduce the homeownership rate noticeably," said Goldman economists Eli Hackel and Hui Shan, the authors of the study.

The proportion of borrowers who carry more than $50,000 in debt stands at 7 percent of 25- to 34-year-old households, Goldman's analysis of household data from the 2010 Survey of Consumer Finance indicated.

“In aggregate," the study concludes, "we do not see student debt threatening housing demand at the macro level yet."

But the study also noted debt-to-income ratios have risen "sharply" for student borrowers in the past 10 years. That ratio can make a big a difference to lenders.

"Nearly 60 percent of bankers rated high debt-to-income ratios as the one factor that makes them most hesitant to approve a consumer loan, according to a recent survey by FICO, developer of the nation's most widely used scoring formula," the Washington Post reported.

"Lenders are still being quite tight-fisted around credit, with memories of the really insufficient underwriting that was going on a few years ago still fresh in their minds," Bernstein told IBTimes. "Where risk was underpriced, now it’s often over-priced.”

Taken together, higher overall indebtedness and more monthly income going to cover student loan payments could make young people increasingly reluctant -- and also unable -- to take on the burden of home ownership. Given that a homeowner is also a consumer and an employer -- writing checks to carpenters, plumbers, landscapers and home furnishing retailers, among others -- that threatens to be a drag on overall economic activity.

“We really can’t get to a more full-fledged recovery until the nation’s housing market starts firing on all cylinders," said Richard Fry, a senior researcher at the Pew Research Center who studies the economic well-being of young adults. "The fact of the matter is, millennials aren’t there yet.”