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The student loan debt issue and its continued effects on housing

In 2013, 40 percent of buyers paid with all cash, which serves to highlight the ongoing impact large-scale investors have had on the national market, particularly in areas riddled with foreclosures or otherwise distressed properties.

The massive amount of student loan debt still holding back a generation of Americans is beginning to adversely impact other corners of the economy and threaten long-term growth.

With hundreds of thousands of 20- and 30-something college graduates and drop-outs hampered by tens of thousands of dollars in debt from their educational costs, the immediate effects are seen in this segment of the population's inability to assume new debt, most notably in the form of being approved for a car loan or opening up a new credit card. But the ultimate repercussions may be broader and more significant. The housing market continues its gradual recovery from the subprime mortgage crisis, and the question that is most frequently posed is one clearly framed by those mountains of debt: Where is the next wave of first-time homebuyers?

Piling up at a rapid pace 
The amount of student debt outstanding to begin 2014 was nearly three times what it was 10 years earlier, totaling more than $1 trillion among adults across the country. Meanwhile, according to the Mortgage Bankers Association, loan applications for home purchases were down 20 percent in February 2014 compared with February 2013. The market is shifting, with a different type of buyer coming to the forefront, but the question is where it's shifting to.

Recent data from RealtyTrac data showed that just 40 percent of home sales in 2013 were completed by way of a traditional mortgage loan. Another 40 percent of buyers paid with all cash, which serves to highlight the ongoing impact large-scale investors have had on the national market, particularly in areas riddled with foreclosures or otherwise distressed properties. As interest rates have begun to climb, the investor presence has been reduced somewhat, but from 2009 through 2013, RealtyTrac found that investor purchases accounted for approximately 30 percent of all home sales.

Cash sales have offered salvation during much of the recovery. Sellers see their prices met and the closing proceedings that a mortgage loan typically entails are largely unnecessary.. Additionally, in 2013, about 15 percent of all sales were still some form of a distressed purchase, while 5 percent were flips - those rehabilitated and re-sold for profit. Distressed sales occurred at a three-year high, representing 16.2 percent of all residential sales, up from the 14.5 percent they accounted for in 2012.

That level of activity - particularly the cash-buyer trend - is not considered sustainable. A recent HousingWire report explored whether it may be masking a general sickness that continues to plague the housing industry. There are concerns as to who will fill the void when those cash-sale opportunities dry up because fewer distressed homes are available. In certain places - most notably California - dissatisfaction has been expressed with the number of investors who have turned their cash purchases into multifamily rental units, often at a marked-up price and at a rate that threatens affordability for many renting families.

So what next? 
There are few promising indications that the Generation X and Y buyers will be presenting themselves in great enough numbers any time soon. Home prices are on the rise nationally, with affordability already threatened in many of the country's metro areas. And with the Federal Reserve expected to proceed with tapering its stimulus program, mortgage interest rates could be on the rise, as well, further complicating the cost equation.

The Washington Post also recently reported that fewer adults are in a position to make a down payment or, for that matter, qualify for a mortgage loan because of their debts, and the issue becomes fairly clear. The nation's economy relies heavily on the housing market to sustain its long-term growth, but without a consistent flow of new buyers, that sustainability is in doubt.

"This is a huge issue for us," David Stevens, chief executive of the Mortgage Bankers Association, told the Post. "Student debt trumps all other consumer debt. It's going to have an extraordinary dampening effect on young people's ability to borrow for a home, and that's going to impact the housing market and the economy at large."

Additionally, the lending environment is less forgiving now for those carrying debt than it was prior to or, in many ways, even during the recession. The recently enacted Qualified Mortgage rule from the U.S. Consumer Financial Protection Bureau hinges on the borrower's "ability to repay," placing greater legal protections for lenders and stipulating that anyone seeking a mortgage loan not be approved if their total monthly debts exceed 43 percent of their monthly gross income.

There are chances that other factors will boost the earnings - and therefore the ability to save and repay debt - of these student-loan-strapped Americans. But for now, the odds are against them and their absence from the housing marketplace threatens its very health.