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   ARTICLE   |   From Scotsman Guide Residential Edition   |   July 2017

Homeownership Trumps Student Debt

Owning property helps build wealth over the long term

The level of student-loan debt in this country is staggering and can appropriately be described as reaching a crisis point. The level of debt quadrupled between 2004 to 2016, from $260 billion to $1.4 trillion.

The average student-loan debt owed per person has nearly doubled in that time, from $18,650 to $33,000. People are being increasingly saddled with this debt throughout their entire lives: The number of people over the age of 60 who are still dealing with student-loan debt is now more than 2.1 million.

This worrisome trend is surely having an impact on the housing market. According to a recent Federal Reserve study, a 10 percent increase in student-loan debt causes a 1 to 2 percentage point drop in the homeownership rate for student-loan borrowers during the first five years after exiting school.

It doesn’t have to be this way, however. Homeownership is actually a solution to this dilemma, and mortgage originators can help borrowers to see this potential more clearly.

Changing times

The more student-loan debt a person has, the less likely the person is to become a homebuyer — even though an individual’s student-loan debt is not by itself a determining factor in the mortgage-qualification process. As an individual’s debt level versus income continues to rise, however, the person normally becomes more unwilling or unable to become a first-time homebuyer.

Homeownership has proven consistently, time and again, to be a great strategy for building one’s personal wealth.

Of course, student-loan debt is only one contributing factor to the delay in young people entering the housing market. Some people point to the changing nature of society, as the internet age has led to more and more business and personal interactions being conducted solely online, with less of a need for a physical presence in one location.

Although it may be true that people need not be tied to one specific location for work anymore, the opposite also is true. People can live where they want and work primarily from their homes or online in many situations, so they can actually choose where to live and stay there instead of chasing jobs around the country.

In addition, the housing crisis of a decade ago is still fresh in the minds of some, leading to concerns over whether or not homeownership is still a sure-fire way of accumulating wealth. The age at which people are marrying is on the rise, which no doubt influences when they begin considering a more permanent residence.

There are certainly situations where becoming a first-time homebuyer may not feel like the best option in a young person’s life. In many cases, however, the decision not to buy a home is made simply because a person is not aware of all the options and has received misinformation on the benefits of homeownership.

Many young people simply do not realize that they can afford to buy a home. They may not be aware of all the tools and programs that mortgage originators can offer to accommodate their specific financial situations. They also may not realize that their income is substantial enough and that the downpayment required is not as much as they thought.

Best bet

Much misinformation was spread in the wake of the housing crisis of 2007, which led many to wonder about the viability and dependability of the housing market. The crisis happened because of a narrow set of circumstances led by a surge of questionable practices by unscrupulous lenders and an increase of high-risk loans.

The industry has since made corrections to prevent such abuses from continuing to take place in an institutional manner. Sound financial practices help to ensure the benefits to the customer are maximized while minimizing the risk involved.

Homeownership has long been central to Americans’ ability to amass wealth. Even with the substantial decline in wealth after the housing bust, the net worth of homeowners over time has significantly outpaced that of renters, who tend as a group to accumulate little, if any, wealth.

A recent study by the Federal Reserve determined that the average net worth of a homeowner is over 36 times greater than that of a renter ($194,500 versus $5,400). While this is partially because people with more money are more likely to own a home, it doesn’t fully explain the extreme difference in the numbers.

When seen in this light, the rent-versus-own debate doesn’t seem to be much of one at all. Of course, owning is not a viable option for everyone in all situations, but for those who have the opportunity, it is usually their best bet.

Wealth builder

Owning a home is not only a better investment in most cases, in strict bottom-line terms, the financial responsibility that is encouraged by homeownership also leads to greater wealth creation — in ways that are not always apparent or obvious. Even in instances where renters have excess cash, saving a substantial amount is difficult without a near-term goal, such as making a downpayment. It also is difficult to systematically invest each month in stocks, bonds and other assets.

Homeownership has proven consistently, time and again, to be a great strategy for building one’s personal wealth. Over time, property and home values in most locations appreciate. While rent payments go into a landlord’s pocket, mortgage payments are in effect paid to oneself, into the equity of the owner’s home.

In addition, rent payments continually rise, whereas a mortgage payment can be locked in at the same rate for up to 30 years. With interest rates still near historic lows, in many cases a home loan can be secured at a significantly lower rate than what is being paid on a student-loan debt. Consolidating that debt into a home loan is simply the best option for a lot of people. This is the opportunity that many are missing out on.

•  •  •

Homeownership remains a great wealth-building strategy for all the traditional reasons, but in this age of low-interest mortgage rates and a student-loan debt crisis, homeownership becomes an even more important tool for reducing debt and increasing wealth.


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