Debt deal strikes blow to housing affordability

The debt ceiling deal dealt a blow to housing affordability last week when the agreement reached by Republicans and the White House put millions of student borrowers on notice for the $1.6 trillion they collectively owe.

A pandemic-era pause on student loan payments added wiggle room to the budgets of house-hunters and renters alike while prices on both sides of the housing market soared.

But even during the pause, some student debt holders struggled to make mortgage and rent payments.

Now the additional monthly costs could be especially hard on debtors hoping to save up enough for a down payment on their first home and those who used extra income to foot basic necessities and make rent.

“People have used the student debt pause to help pay for their rent and mortgage. They’ve been paying for basic necessities: rent, mortgage, food, health care,” said Natalia Abrams, president of the nonprofit Student Debt Crisis Center (SDCC).

“I can only imagine that this is going to severely harm the housing market and the rental market,” she added.

After the deal, the advocacy organization Debt Collective asked its social media followers about the changes they would make when payments resume. 

The top responses out of the hundreds the nonprofit received included concerns about paying rent, delaying home purchases, moving back in with parents, and even getting a roommate at age 38.

Student loan repayments were originally set to restart 60 days after the Supreme Court decision on President Biden’s student debt relief plan or 60 days after June 30, whichever came first.

However, Biden and McCarthy agreed in the debt ceiling deal that student loan repayments will begin 60 days after June 30 — without room for a possible extension.

This stipulation in the debt ceiling agreement crushed the hopes of student borrower advocates, who were pushing for the White House to extend the payment pause once again.

Advocates’ anger with the deal also stems from the Biden administration’s admission that if student loans begin again with no debt relief, many borrowers will default on their payments because they can’t afford it.

The possibility of student debt relief still remains to be seen with the decision from the Supreme Court on the issue fast approaching.

Rising mortgage costs are squeezing first-time buyers

Student debt is one of the main barriers preventing younger buyers from purchasing their first home, economists told The Hill. Without equity built through previous purchases, these buyers are at a disadvantage in an already pricey and competitive market.

The monthly mortgage payment for homes listed at the median asking price hit a record high at $2,651 with a 6.79 percent mortgage rate, data from real estate brokerage Redfin shows. This is up 15 percent — nearly $350 — from the same time last year.

Separate data shows the average rent across the nation is more than $1,700 per month.

Even if affordability improves later this year, younger buyers might still struggle to compete, said Nadia Evangelou, a senior economist at the National Association of Realtors, in an interview with The Hill.

This is partly due to the way the market is stacked against potential buyers with less savings and previous home equity.

“First-time home buyers unfortunately cannot compete with existing homeowners because existing homeowners can use this web of gains for a downpayment and they offer cash offers as well,” she said.

More than half of student loan borrowers with defaulted loans reported that the debt stops them from affording a home, according to an SDCC report from May.

While estimates vary, student loan borrowers have on average around $35,000 in student loan debt. 

During the pandemic, even when student loan payments were paused, borrowers struggled with affording their rent or mortgage payments. 

Between 2020 and 2022, the percentage of borrowers who could not afford rent rose sharply, according to a separate SDCC report. In May 2020, 8 percent of borrowers had trouble affording rent or mortgage payments, while in November 2022, 9 percent of borrowers faced hardship affording rent or their mortgage. 

A rocky restart to payments

Student loan borrowers are also expected to have a rocky restart to payments.

Student loan servicers have warned they do not have enough staff to handle the customer service demands that will ensure, even as the Biden administration pledged it will do all it can to ensure a smooth transition back to repayment. 

Despite possible housing affordability complications for borrowers, overall harm to the housing market might be mitigated by reaching a deal before the ceiling was breached and the U.S. defaulted on its debt for the first time in history.

“Younger buyers are already struggling to save up for a down payment, paying a substantial part of their income to quickly rising rent,” Zillow Chief Economist Skylar Olsen told The Hill.

“Pausing payments helps bring forward the ability to buy for some, and repayments will certainly make it harder for some younger would-be buyers, but it’s not likely to have a huge impact on housing demand,” she continued.

“The benefit of avoiding a debt default outweighs this when it comes to housing affordability.”

The real estate company projected that high mortgage rates would move even higher after a default, potentially exceeding 8.4 percent by autumn.

“We also would have seen about 700,000 home sales wiped out over the next 18 months if there had been a default,” Olsen continued.

But even with the deal, market conditions could remain tight amid high demand while younger buyers face ongoing challenges.

“Younger buyers will continue to deal with the realities we’ve seen play out over the last year: Down payment being the biggest obstacle, followed by high monthly payments, and limited options to choose from,” Olsen said.