A report from the New York Federal Reserve late last year estimated that the student debt of Americans was about $1.5 trillion, the majority of which is owed by millennials.
That huge number has been a key factor in the choices many millennials have made about their financial lives—including their decisions about housing.
The oft-repeated trope about millennials having to delay “adulting” due to the burdens of student debt, combined with anemic wage growth for much of the last decade, has been, in some respects, true. Yes, more young Americans today have chosen to live with their parents after college than Gen Xers did.
But that is only part of the story. Research suggests that millennials are starting to move out—and buying their first homes. As a provider of liquidity for lenders and investors in home mortgages, that’s good news for my company, Fannie Mae, as well as the housing finance industry we serve. But challenges remain if we are to meet this growing demand for housing, and not all of them are financial in nature.
The increase in the homeownership rate in recent years has started to tick up, and that growth has been driven primarily by younger and lower-income households. The homeownership rate among households headed by somebody younger than 35 increased from 34.2% in the first quarter of 2016 to 35.4% in the first quarter of 2019. That may appear to be a small bump, but in relative terms, it’s 84% larger than the increase in homeownership among the population as a whole.
Fannie Mae’s research suggests that student debt has probably delayed homeownership, not prevented it altogether. And it bears remembering that those with a college degree are more likely to own a home than those without—even if they have student debt.
I had the opportunity to discuss the effects of student debt at the Fortune Brainstorm Finance conference last month with Anand Cavale, head of consumer lending at SoFi, a San Francisco-based lender with a specialty in refinancing student debt.
I took away two housing-related themes from our discussion. First, young Americans with student debt don’t always know or understand their options, including many of the basics about home buying and borrowing. And second, while student debt may complicate homeownership, a much bigger problem is the out-of-whack cost of housing.
For instance, when it comes to eligibility for a mortgage loan, student debt is not always treated with the same weight as other forms of consumer debt. Borrowers and their families have financing options that can open up homeownership possibilities or help a family refinance student loans with lower-cost debt. Further, Fannie Mae survey research shows that there is often a gap between perception and reality when it comes to what it takes to qualify for a mortgage. That is, many younger people who don’t own a home think they would not qualify for a mortgage, when in fact they could.
Student debt, or even qualifying for a mortgage, is not always the biggest obstacle to homeownership. The much larger problem—one faced by many Americans of modest means, whether they are recent college graduates or working parents—is the lack of homes at prices they can afford. Indeed, overcoming student debt is achievable, but finding a decent home you can afford on a working person’s wage has, in many cities, become nearly impossible.
Demand for homes from the so-called millennial generation is rising. But meeting the demand will require more from the housing and mortgage finance industries than what we provided previous generations. Our industry can and should make it easier to understand the mortgage and home-buying process. We can also do more to ensure first-time home buyers have the knowledge necessary to make informed choices about homeownership. And perhaps our biggest task is not only providing millennials a loan they can afford, but also a house they can afford.
Hugh Frater is the CEO of Fannie Mae.