Sunday, April 29, 2012

Student Loans, Home Buying and Interest Rates ... Unconventional Advice

Student loans are now higher than $1 trillion and rising, and delinquencies on those loans are approximately one in four.

Student-Loan Debt Tops $1 Trillion provides an update on the broader ramifications of burdensome student loans, including the need to postpone home buying:

"The amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes, potentially slowing the housing recovery . . . .
Total student debt outstanding appears to have surpassed $1 trillion late last year, said officials at the Consumer Financial Protection Bureau, a federal agency created in the wake of the financial crisis. That would be roughly 16% higher than an estimate earlier this year by the Federal Reserve Bank of New York. . . .
CFPB officials say student debt is rising for several reasons, including a surge in Americans going to college in recent years to escape the weak labor market. Also, tuition increases—which many colleges say are needed to offset big cuts in state funding—have many students taking out bigger loans.
In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, bureau officials said. New York Fed data show that as many as one in four student borrowers who have begun repaying their education debts are behind on payments.
Economists say college is an increasingly good investment because of the widening pay gap between jobs that require a degree and those that don't. Ultimately, the educational degrees and added skills are meant to help workers earn higher incomes that, in time, will more than offset the student debt.
But as more people go to college and assume bigger loans for education, they may take longer than previous generations to hit key milestones such as buying a house or getting married, U.S. officials and economists say. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.
Rohit Chopra, student-loan ombudsman for the Consumer Financial Protection Bureau, said student debt could ultimately slow the recovery of the housing market. "First-time home-buyers are a substantial part of the housing market," Mr. Chopra said in a speech at the banking conference in Austin. "Instead of saving for a down payment, these borrowers are sending big payments every month."
Student debt is a burden not just for recent college graduates in their 20s but also parents, who often co-sign their children's student loans, as well as midcareer professionals who opted to go back to school during the sluggish recovery."
But Low Interest Rates Are No Good Reason To Buy A House
Home affordability is often touted as a plus today due to low interest rates. But that's no reason to hurry out and buy a house. To the contrary, it's an excellent reason not to buy right now.
The best financial advice may well be to rent for now and pay off those student loans. And if you have no outstanding student loans, that's so much the better. You still should rent for now.
Then when the "affordability" factor declines enough in the next several years, that will be a much better time to buy a home. But what about the then higher interest rates and lessened affordability, you ask?
Well, that's the best part of the story, even if it's one not generally told. So we'll go ahead and tell it here.
The Best Time To Buy A House Is Not When Rates Are Low
The best time to buy a house may well be when interest rates are quite high and not very low. But how can that be?
Well, let's listen to the very sensible, if not generally offered, advice given in Beware of Housing Prices:
"The recent frenzy in the housing market is very interesting, although somewhat counterintuitive, and deserves consideration. In my neck of the woods, and I am sure in others, certain people are getting caught up in the sudden change in interest rates, but those same people are missing a very important relationship in the “home value” equation that I hope to reveal here. . . . Everyone knows when interest rates increase the monthly mortgage payment increases, so if prices are held the same and interest rates rise, then the affordability ratio declines. . . .
The best time to buy a house (assuming moderate inflation), is not when interest rates are at all-time lows, but instead when interest rates are high because prices and interest rates are inversely related. . . . “Get in when rates are low” they say, but we never hear them say beware when rates go up because home prices decline. They might have a slight vested interest in making a sale, and on the surface, people like the idea of locking in a low rate. But it is much better to buy a home when rates are high and prices are low, and then when rates decline refinance into that lower rate instead. That is investment 101."
Summing Up
Financially speaking, buying when interest rates are high and then refinancing when they're low is awfully good advice.
Student loans are too high.
Pay off the loans before jumping into house related debt.
Home sales are quite low.
Financially, it makes the most sense to wait until home prices come down after interest rates go up, even though that could be several more years.
Even if the realtors or home builders don't want us to know that.
Clean up your financial affairs and don't worry about missing a great buying opportunity in the housing market.
There will probably be an even greater one down the road.
Thanks. Bob.