The American dream of homeownership has historically been symbolic of financial success. For millennials with student loan debt, the American dream of homeownership feels more elusive now that student debt payments have resumed. Some millennials have been able to achieve homeownership during the Pandemic when mortgage rates reached record lows. For more than a decade, homebuyers faced an array of challenges, including high interest rates and rising prices. They must now deal with the added burden of monthly payments for student loans. Student debt is only 2% of a household’s income if they earn $100,000 per year. People tend to group expenses together. Behavioral economists call this cognitive bias mental accounting. In their minds, homebuyers may combine their mortgage debt with their student loan debt and feel that they need to reduce their housing debt to offset the student loan debt. Homebuyers may feel the need to reduce their housing budget by 8% ($200) in order to compensate for student debt. To compensate for the added cost of student debt, homebuyers may feel the need to trim their housing budget by 8% ($200) to keep their debt under control.
Homebuyers’ budgets have already been stretched thin by rising mortgage rates and home prices. Prior to the pandemic the average homebuyer made a monthly mortgage payment of less than $1500. Since then, mortgage payment has risen by over 70%. This is much faster than many first-time buyers could manage, and they are now unable to become homeowners. For the many who will now have the added expense of student loan debt, homeownership feels even less tangible.
Some aspiring homebuyers will not want to take on any new debt until their student is paid off. It could cause them to delay homebuying for many years. Redfin’s survey found that 16% of Gen Zers, and 21% of millennials said they needed to pay off their student loans before buying a house. Gen Zers are likely to be more cautious when it comes to taking on excessive debt. Gen-Zers may choose affordable education or pursue high-demand jobs that do not require a degree to reduce their dependence on student loans. Americans in their 30s owe more in student loans than Americans under 30. Gen Zers are more optimistic about their chances of owning a home than millennials, and the growing difference in student debt could make this generational divide even more stark.