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U.S. Building Market Intelligence, December 2011

Skyrocketing Student Loan Debt Will Delay Homeownership
Skyrocketing Student Loan Debt Will Delay Homeownership
  
   Rick Palacios
Senior Research Analyst

December 9, 2011

Student loan debt now totals $865 billion, which is greater than all credit card debt outstanding, as well as all other types of household debt except for mortgages! College graduates have debt averaging $25,000. Even more troubling is the rise in debts associated with for-profit college and trade schools, whose revenues come primarily from debt available through Federal government programs. The debt load is so high, and the job outlook so bleak, that student loan default rates have almost doubled. With the economy little improved since 2009 (two-year lag on data), default rates are bound to rise further.

Student loans are going to be yet another hurdle for the housing market to overcome. Faced with mounting student loan debt, poor job prospects and stagnant wages, an increasing amount of 25 to 34 year olds (a prized demographic for the housing sector) have moved back in with their parents. Almost 6 million 25 to 34 year olds now live with mom and dad, up 26% from when the recession started in 2007. Today's 36.8% homeownership rate for 25 to 29 year olds is at its lowest level since 1999, and homeownership for 30 to 34 year olds is at its lowest rate in 17 years.

The good news is that this pent-up demand will ultimately provide a much needed boost to the housing sector. The bad news is that the boost will be heavily skewed to the rental market as it will take longer than ever for young people to qualify for a mortgage, especially if more and more graduates are hit with credit blemishes from unpaid student debt.

To help struggling graduates, the Obama Administration recently announced a program to help those with student debt reduce their payments down to 10% of their income. However, with student loans at 10% of income, how will these people be able to qualify for a home?

All of this analysis contributes to our belief that the lion's share of housing demand will end up in the rental market. Look at the tremendous growth we expect in rentals in comparison to the last decade.

U.S. Housing Market Statistics

Economic Growth............................................................................C-
The U.S. economy continues to steadily improve, albeit at a rate far below past recoveries. Notably, 3Q11 GDP growth is at 2.0%, the job picture is slowly improving, and businesses are beginning to expand capacity.

Leading Indicators...........................................................................C-
Global economic uncertainty hit the stock market in November, with almost all major indices witnessing sequential losses in November. Were it not for the end of month rally (largest daily advance since March 2009), the losses would have been much worse.

Affordability......................................................................................C+
Ridiculously low mortgage rates coupled with growth in median household incomes (still low by historical standards) helped push our JBREC Affordability Index to an A+ grade this month. Negative equity, however, continues to weight on this subset of indicators, leading to an overall affordability grade of C+.

Consumer Behavior..........................................................................D+
Two of the three major consumer psyche gauges improved in November, helping our overall consumer behavior grade improve from a D to D+ this month. In addition, most consumer credit default indices improved, as did personal savings.

Existing Home Market.......................................................................D
Aside from NAR October resale prices, all of our existing home market indicators improved this month, though still not enough to boost this subsection of the economy’s grading from a D.

New Home Market..............................................................................C-
The overwhelming majority of new home indicators improved this month, helping boost our overall grade for this subsection of the economy from a D+ to C-.

Repairs and Remodeling....................................................................C-
Only two of the eight residential repairs and remodeling indicators we track reported new data this month (BuildFax Residential Remodeling Index and private residential construction), both of which turned in positive results. Nevertheless, our overall grade for this subsection of the economy remains unchanged at a C-.

Housing Supply...................................................................................F
Single-family starts and permits rose from last month, though not enough to improve our overall housing supply indicator grade of F. The multifamily space continues to ramp up supply in an attempt to capitalize on demand for rentals.


U.S. HOUSING MARKET STATISTICS
Data Current Through December 5, 2011
 
    
Grade*
Overall Grade
        
D+
                
                
Statistic
    
Grade
Economic Growth
        
C-
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate)2.0%C
Employment Growth (1-year Change)
   - Non-ag Payroll, NSA1,588,000C
Employment Growth Rate
   - Non-ag Payroll, NSA1.2%C
Unemployment Rate8.6%D
   Average Length of Unemployment (Weeks)40.9
   Median Length of Unemployment (Weeks)21.6
   % of Labor Force Unemployed (27 weeks and over)3.7%
U.S. Initial Jobless Claims  352,300
Mass Layoff Events, SA (YOY % Change)-12.2%B-
Productivity2.3%C
Retail Sales5.9%C+
Capacity Utilization77.8%C-
Inflation
   Core CPI2.1%B
   Full CPI3.5%C
Personal Income Growth, nominal3.9%C-
Federal Deficit (last 12 mos., $mil curr.)-$1,314,253F
U.S. Immigration as a % of Total Population0.3%
Total Population Growth1.1%
Total Households113,550,000
   - Growth Rate1.5%C
Owned Households  75,250,000
   - Growth Rate0.5%D+
Rented Households  38,299,000
   - Growth Rate3.4%B
                
                
Statistic
    
Grade
Leading Indicators
        
C-
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.)6.1%C+
ECRI Leading Index-7.3%D+
Manpower Net Employment Outlook7%D
U.S. Vistage CEO Confidence Index8350%
CEO Economic Outlook Survey7760%
U.S. Average Hours Worked per Week33.6
Temporary Employed Workers (YOY % Change)7.8%C+
Corporate Profit Growth (pre-tax)7.9%C
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.)153.0%
Capital Goods New Orders9.2%B-
Money Supply - M26.2%B
Interest Rate Spread
10-year Treasury1.94%
2-year Treasury0.27%
   Interest Rate Spread1.67%B-
3-month LIBOR0.50%
3-month Treasury0.02%
   TED Spread0.48%C
Stock Market (Return over last 12 months)
   Dow Jones 9%C
   S&P 5006%C
   NASDAQ5%C
   Wilshire 50005%C
   S&P Super Homebuilding6%C
Tougher Standards on Business Loans - Large Firms-6%B
- Small Firms-6%B
Crude Oil Price (Current $)$100.19D-
ISM Manufacturing Index52.7C
ISM Non-Manufacturing Business Activity Index56.2C
                
                
Statistic
    
Grade
Affordability
        
C+
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 - 1.0 points are also paid up front by the borrower)
JBREC Affordability Index0.0A+
US Median Home Payment / Income Ratio22.1%
US Median Home Price / Income Ratio2.9B+
Mortgage Rates, Fixed3.98%A+
Mortgage Rates, Adjustable2.79%A+
   Fixed/Adjustable Spread1.19%D+
   Fixed/10-year Spread2.04%C
Fed Funds Rate0.15%
Percentage of Adjust. Loans5.8%B+
Equity/Owned Home (Current $)$84,256F
Avg. Debt % in Home (LTV) - Homes with Mortgages84.4%F
Median Household Income$56,281
   - Growth Rate, nominal2.0%D+
                
                
Statistic
    
Grade
Consumer Behavior
        
D+
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index56.0D
Consumer Sentiment Index64.1D-
Consumer Comfort Index-50.6F
Revolving Cons. Credit per Household (inflation adjusted)$6,954
   - Growth Rate-3.4%B
Personal Savings Rate3.5%D+
U.S. Net Worth Growth Rate8.4%C
Financial Obligation Ratio16.1%B+
Misery Index (Unemployment + Inflation)12.53C-
                
                
Statistic
    
Grade
Existing Home Market
        
D
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change)-3.9%D+
NAR Single-Family Median Home Price$161,600
NAR Single-Family Annual Price Appreciation-5.8%D
Freddie Mac Annual Price Appreciation-4.3%D
Annual Sales Volume, SA4,970,000B-
Existing Home Inventory for Sale, SA3,330,000D+
Months Supply of Unsold Homes, SA8.0C
Purchase Mort. App. Index, SA192.1D+
Pending Home Sales Index, SA93.3D+
Homeownership Rate66.3%C+
                
                
Statistic
    
Grade
New Home Market
        
C-
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index20F
Multifamily Condo Market Index28C-
Median Price, NSA$212,300
Annual Appreciation Rate4.0%C
Constant Quality Price Index (YOY % Change)-1.3%D
Sales Volume, SA307,000F
New Home Inventory for Sale, NSA162,000A+
Months Supply of Unsold Homes, SA6.3C
   Months of Homes Completed, SA2.3C
   Months of Homes Under Const., SA2.9B
   Months of Homes Not Started, SA1.1C
                
                
Statistic
    
Grade
Repairs and Remodeling
        
C-
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change)3.5%C
NAHB Remodeling Market Index - Current43.0C-
NAHB Remodeling Market Index - Future Expectations40.4C-
Private Residential Construction (YOY % Change)1.7%C
Residential Investment as % of GDP2.2%F
                
                
Statistic
    
Grade
Housing Supply
        
F
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA584,000F
Single-Family Starts, SA430,000F
Multifamily Starts, SA198,000D-
   Total Starts, SA628,000F
Single-Family Permits, SA434,000F
Multifamily Permits, SA219,000D-
   Total Permits, SA653,000F
Manuf. Housing Placements, SA41,000F
   Total Supply, SA694,000F
Total Housing Stock 132,353,000
Excess Vacancy105330119.6%D
                
                
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
* The best 15% ever are "A" scores, the average is a "C", and the worst 15% ever are "F" scores, with distributions throughout.