Student Debt Potentially Harmful for RE

One aspect of consumer credit has a time-bomb potential when it comes to the health of the economy, and even certain aspects of residential and commercial real estate: student loans.

One aspect of consumer credit has a time-bomb potential when it comes to the health of the economy, and even certain aspects of residential and even commercial real estate: student loans. It’s no secret that a generation of students has been yoked to the dead weight of student loans, a problem that has become worse during the recession and post-recession years. On Monday, the Federal Reserve released the latest consumer credit numbers, one aspect of which is student loans. Back in 2010, the total outstanding balance for U.S. student loans was $912.4 billion, a large enough number. But as of 2014, the total was $1.322 trillion. Some estimates put the total at roughly twice as much by 2025.

About one in five U.S. households now carry student loan debt, according to the Pew Research Center, compared with less than 10 percent in 1989. And a good many of those householders aren’t kids any more. About 63 percent of student debt is held by people ranging in age from 30 to 59, and even households that include seniors (age age 65 to 74) have some: about 1 percent of total, a number that itself has grown from almost nothing 10 years ago. More than $18 billion in student debt is held by Americans age 65 and up, according to the Government Accounting Office.

Even so, the heaviest burden nevertheless rests on the large, upcoming generation of Millennials, and the impact is coming into focus. Households headed by young adults owing student debt lag far behind their peers in terms of wealth accumulation, the Pew Research Center said in a 2014 study. About 37 percent of households headed by an adult younger than 40 currently have some student debt, with a median outstanding debt load standing at about $13,000. That kind of indebtedness gets in the way of other kinds of spending by those households, especially that which requires borrowing other large sums.

The impact of ballooning student loan on real estate is still mostly hypothetical. But less money for spending, and less ability to borrow among a large generation of consumers, presumably would mean fewer single-family home purchases in the long run, though other factors (such as anemic wages) are surely at work. That would probably be a good thing for multi-family owners and developers, but not so good for retail property owners and developers and perhaps, indirectly, industrial real estate too. An important driver in consumer spending is homeownership, both for items that go in the home, and because of the wealth effect that owning a home generally confers on the owner. A generation of long-term debtors isn’t going to be one that feels a wealth effect, and some kinds of real estate might suffer for it.