Is Student Loan Debt a Threat to Home Ownership?

Is Student Loan Debt A Threat to Homeownership? No! | MyKCM

Over the course of the last thirty years, a shift has happened. An entire generation has been raised to believe that a college education is their key to unlocking opportunities that were not available to their parent’s or grandparent’s generations.

Due to this, student loan debt has soared to $1.5 trillion and represents the largest category of debt, surpassing credit card and auto loan debt in 2010 and never looking back. As more and more Americans continue their education amongst rising tuition costs, this number will no doubt increase.

Many housing experts have blamed student loans for a drop in the homeownership rate for young families, and to an extent, they’ve been right. Increased debt at the time of graduation has no doubt limited young people from being able to afford a home at the same rate as their parents or grandparents did at the same age.

In a recent Forbes article, the author explained that “in just the class of 2017, the average student has about $40,000 in debt — almost enough for a 20% down payment on a median-priced home.”

The Federal Reserve set out to determine exactly how much impact student loan debt has had on the homeownership rate of those 18-34 (millennials). Their results found that,

Every $1,000 in student loan debt delays homeownership by about 2.5 months, but it doesn’t prevent homeownership entirely.

In fact, by the time college grads reach their 30s, those with student loan debt have a homeownership rate nearly identical to those who didn’t take out loans.” (emphasis added)

In the Wall Street Journal’s coverage of the Fed report, they found that recent graduates prioritize paying off their student loans over saving for a down payment, despite their desire to be a homeowner. Many with debt want to “get that monkey off (their) back (before they) make any new investments.”

This has just delayed the wave of young home buyers from hitting the market. But as Danielle Hale, the Chief Economist at realtor.com warns,

“2020 will be peak millennial, the year when the largest number of millennials will turn 30.”

By age 30, those who attained a bachelor’s degree right after high school will be one or two years away from paying off their loans and will have been in their career long enough to earn a higher salary.

In the long run, research shows that attaining a bachelor’s degree or more actually increases the chances that someone will become a homeowner.

Bottom Line

If you are one of the many millennials who has prioritized paying down your student loans over saving for a down payment, you’re not alone. Even if you are a couple years away from paying off your loans, let’s get together to help you determine if waiting really is the best decision for you!

The Science of Selling

Listing a home is more than just packing, decluttering, and depersonalizing. I am a firm believer in the science of the sale.

Those listing broker personal touches are what transcend a listing from good to great.

Buyer impressions are made from the moment they pull up to the home. Otherwise known as curb appeal.  Is the landscaping tidy? Is there a mix of colors? Are the walkway, front steps, porch, and door all dirt free?

When a buyer walks through the door does it feel like home? Does it smell like home? Is the lighting right? Does the house flow with proper movement? Are questions readily answered? And above all, does the listing show effort on the seller’s part?

All of these aspects set the tone and perception of the home’s general condition whether warranted or not. Subconsciously the buyer feels the home is well cared for.

To be even more specific, the home must appeal to several of the buyer’s senses and not be overstimulating. For example, strong or competing smells are a no-no. Use one simple scent like a diffuser of soft vanilla. Over saturation of color, scent, and sound also confuse the brain and cause dissonance and confusion. The buyer has to work much harder to make sense of the environment when they are faced with sensory overload.

Bottom Line:

Behind every good listing is an amazing listing broker. To learn more about the right marketing and staging strategy for your home let’s set an appointment.

The Cost of NOT Paying PMI

Saving for a down payment is often the biggest hurdle for a first-time home buyer as median incomes, rents, and home prices all vary depending on where you live.

There is a common misconception among home buyers that a 20% down payment is required, and it is this limiting belief that often adds months, and sometimes even years, to the home-buying process.

So, if you can purchase a home with less than a 20% down payment… why aren’t more people doing just that?

One Possible Answer: Private Mortgage Insurance (PMI)

Freddie Mac defines PMI as:

“An insurance policy that protects the lender if you are unable to pay your mortgage. It’s a monthly fee, rolled into your mortgage payment, that is required for all conforming, conventional loans that have down payments less than 20%.

Once you’ve built equity of 20% in your home, you can cancel your PMI and remove that expense from your mortgage payment.”

As the borrower, you pay the monthly premiums for the insurance policy, and the lender is the beneficiary. The monthly cost of your PMI depends on the home’s value, the amount of your down payment, and your credit score.

Below is a table showing the difference in monthly mortgage payment for a $250,000 home with a 3% down payment and PMI vs. a 20% down payment without PMI:

The Cost of NOT Paying PMI | MyKCM

The first thing you see when looking at the table above is no doubt the added $320 a month that you would be spending on your monthly mortgage cost. The second thing that should stand out is that a 20% down payment is $50,000!

If you are buying your first home, $50,000 is a large sum of money that takes discipline and sacrifice to save. Many first-time buyers save for 5-10 years before buying their homes.

To save $50,000 in 10 years, you would need to save about $420 a month. On the other hand, if you save that same $420 a month, you could afford a 3% down payment in less than a year and a half.

In a recent article by My Mortgage Insider, they explain what could happen in the market while you are waiting to save for a higher down payment:

“The time it takes to save a (larger) down payment could mean higher home prices and tougher qualifying down the road. For many buyers, it could prove much cheaper and quicker to opt for the 3% down mortgage immediately.”

If the prospect of having to pay PMI is holding you back from buying a home today, Freddie Mac has this advice,

“It’s no doubt an added cost, but it’s enabling you to buy now and begin building equity versus waiting 5 to 10 years to build enough savings for a 20% down payment.”

Based on results of the most recent Home Price Expectation Survey, a homeowner who purchased a $250,000 home in January would gain $50,000 in equity over the next five years based on home price appreciation alone (shown below).

The Cost of NOT Paying PMI | MyKCM

Bottom Line

If you have questions about whether you should buy now or wait until you’ve saved a larger down payment, let’s get together to discuss our market’s conditions and help you make the best decision for you and your family.

How Much Has Your Home Increased in Value

Home values have risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.2% year-over-year.

CoreLogic broke down appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price.

The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from July 2017 to July 2018 (the latest data available). 

How Much Has Your Home Increased in Value? | MyKCM

It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor which determines how much your home has appreciated over the course of the last year.

Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.

Bottom Line

If you are planning to list your home for sale in today’s market, let’s get together to go over exactly what’s going on in your area and your price range.