The American dream of homeownership has historically been symbolic of financial success. But for millennials burdened by student loan debt, it feels more elusive than ever now as student debt payments resume. While some millennials were able to cross the finish line to homeownership when mortgage rates were at record lows during the pandemic. First-time homebuyers now have several hurdles in their way, including student debt.
For more than a year, prospective homebuyers have faced a perfect storm of high interest rates, rising home prices, a shortage of inventory, and rising insurance costs. Now, they must grapple with the additional burden of monthly student loan payments.
To put things into perspective, the typical monthly student loan payment is around $200. For a household earning $100,000 a year, student debt would only be 2% of their income. But people tend to lump expenses together in their minds. This cognitive bias is known as mental accounting by behavioral economists. Homebuyers may lump their mortgage debt in with their student debt in their minds, and feel the need to lower their housing debt to offset their student debt. The typical mortgage payment for a home currently on the market is $2,600. To compensate for the added cost of student debt, homebuyers may feel the need to trim their housing budget by 8% ($200) to keep their debt under control.
Homebuyers’ budgets have already been stretched thin by rising mortgage rates and home prices. Before the pandemic, the typical homebuyer’s monthly mortgage payment was less than $1500. Since then, mortgage payments have soared by more than 70%, much faster than most aspiring first-time homebuyers could keep up with, leaving many shut out of homeownership. For the many who will now have the added expense of student loan debt, homeownership feels even less tangible.
Some aspiring homebuyers will not want to take on any new debt until their student is paid off. This could delay their homebuying plans for years, if not indefinitely. According to a survey from Redfin, One-fifth (21%) of Gen Zers and 16% of millennials say they need to pay off student loan debt before they can buy a home.
In contrast to their millennial counterparts, Generation Z may approach homeownership differently. Having witnessed the financial struggles of older generations, Gen Zers may be more cautious about taking on excessive student loan debt. Gen-Z may prioritize choosing affordable education options or pursuing high-demand careers that don’t require a college degree, thus reducing their reliance on student loans. Americans under 30 currently owe less in student debt than Americans in their 30s. Gen Zers feel more optimistic than millennials about the likelihood they will one day own a home, and growing differences in their student debt obligations could make that generational divide in homebuying attitudes even more stark.