Student loan debt has tripled over the past 10 years, reaching $1.2 trillion in the fourth quarter of 2015. Total student loan debt now accounts for 10.2% of total household debt, the second largest category behind mortgage debt and up from 3.9% in December 2005. In part, this increase in the aggregate level of oustanding student debt is due to rapidly rising tuition costs, greater enrollment among Millennials and increasing reliance of loans to fund tuition. Meanwhile, of those 35 years or younger, homeownership rates has fallen to 34.7% in the fourth quarter of 2015, down from 43.1% ten years earlier. Since the Great Recession, the growth in student loan debt seems to be reducing both household formation and homeownership.
There are 83 million Millennials between 18 and 36 years old, which represent more than one quarter of the nation’s population. Millennials are now the largest, most diverse generation in the U.S. population. Millennials represent a bigger demographic than their boomer parents, with vastly different life experiences. Only 21% of Millennials are married, while 42% of Boomers were married at their age. Millennials are the most educated generation, where nearly 1 in 4 have a Bachelor’s degree or higher.
College loans are likely cutting into savings and delaying marriage and families for this younger generation. Student debt makes it hard to be financially healthy and accumulate savings for a down payment and qualify for a mortgage. In addition, student loans have exhibited high delinquency and default rates, impairing the credit scores of many borrowers. According to the Federal Reserve’s Survey of Consumer Finances, 30% of millennial borrowers with a degree were not making payments on their student loan debt in 2013.
Key Takeaway: Millennial home buying rates may increase in the years to come; however, the ultimate home ownership rates will probably end up lower than their parents’ rates at similar stages in lives due to high student loan debt and lower marriage rates. This will lead to weaker demand for homeownership and continued stronger demand for rental units.
From an investment perspective, the commercial real estate securities linked to the multifamily sector have been a strong relative performer over the last few years. Demographics remain favorable for multifamily apartments, suggesting a long-term rental demand that I expect will continue based on the trends cited above.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
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