In this episode of the REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi explain the connection between educational attainment and homeownership, and how student loan debt forgiveness may impact the housing market.

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Listen to the REconomy Podcast™ Episode 47:

“Our research finds that the importance of education to homeownership has only increased over time, the impact of educational attainment on the likelihood of homeownership has more than doubled in 20 years. In 2000, the difference in the homeownership rate between those with a high school degree and those with a college degree was nearly 4%. By 2021, this gap more than doubled to 7.5%.” – Odeta Kushi, deputy chief economist at First American

Transcript:

Odeta Kushi - Hello, and welcome to episode 47 of the REconomy podcast, where we discuss economic issues that impact real estate, housing and affordability. I am Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey, Mark. It's that time of year again, isn't it?

Mark Fleming - Yes, the fall is here, it's September, so it must be football season.

Odeta Kushi - Oh, yeah. Yep. But that's not what I'm talking about. September is back to school month. And, recently, there's been some buzz around student loan debt, given the White House proposal. So we want to take this episode to talk about the relationship between educational attainment and homeownership and whether student loan debt is an insurmountable barrier to homeownership.

Mark Fleming - Oh, it's that season. I suppose, probably that's a topic that is more appropriate for a podcast called REconomy than football. We're often told that education is the key to a more secure financial future. Most people spend at least 12 years in their primary education as students and even more if they pursue higher education. We'll get to how long it took me in a little bit. But does more education equate to increased earning potential? And, if so, does the increased earning potential translate to a greater likelihood of becoming a homeowner? That's what we're going to tackle in today's episode.

Odeta Kushi - Exactly. Well, if education is the key to a more secure financial future, than millennials are on the right track. The millennial generation - those between the ages of 26 and 41 in 2022. Yours truly is a millennial. They're the largest living adult generation. Many millennials are well into their careers, while others are still in school. And, according to our research, millennials are the most educated generation in American history. So we analyzed some data from 2021 and found that approximately 38% of millennials have a bachelor's degree or higher compared with 32% of Generation X and 15% of baby boomers, when they were the same age. Millennials also earned their bachelor's degree much quicker than previous generations. By their mid-40s, 30% of baby boomers had a bachelor's degree or higher. Gen X reached that mark by their late 20s. But millennials achieved that educational milestone by their mid-20s. And, since you mentioned football at the top of the episode, for those keeping score, that's millennials, my generation one and Gen X, Mark's generation, zero

Mark Fleming - Odeta, in football, a score is worth seven points, if you assumed the extra point was good. So, seven to zero. But I digress. And that, by the way, is a good SAT word. We know that education takes time and money. So, is it actually paying off?

Odeta Kushi - Well, yeah, one of the primary objectives of education is to get a well-paying job. So, we could measure success by analyzing median household incomes by educational attainment.

Mark Fleming - Better yet, let's do that analysis for millennials, specifically.

Odeta Kushi - Yes, let's. Well, the short answer is education is paying off. In 2020, millennials with a bachelor's degree had a median household income of over $100,000, while those with at least a graduate degree had a median household income of over $120,000. These levels are significantly higher than the median household income of millennials with just a high school degree, or some college at about $60,000.

Mark Fleming - And the income difference is even more stark when compared with millennials with no high school degree who have a median household income of $35,000, demonstrating the earning power benefit of greater educational achievement. And the differences get even bigger when one considers the fact that those differences are for one year's worth of income, but the earnings advantage accrues over the person's entire working life.

Odeta Kushi - That's a really good point. And then, of course, we have to talk about what this means for homeownership.

Mark Fleming - Yeah, not just because this is REconomy, but also because homeownership significantly accelerates household wealth creation. All that education, as we said, takes time and money. Clearly, higher educational attainment is yielding higher incomes, which justifies the money part of education. But the time matters here too. Millennials have delayed key lifestyle decisions in favor of investing in the pursuit of education. We call that investment in their human capital, pushing marriage and family formation to their early-to-mid-30s. Previous generations made these lifestyle choices in their 20s. Right, marriage and family formation are two of the most powerful motivations for homeownership. Love then marriage. Okay, sorry, I'm thinking Al Bundy, but I really should be thinking about homeownership here.

Odeta Kushi - I think so. That's the housing economist remix, I think. First comes love. Then comes marriage. Then comes homeownership. So, these delayed lifestyle choices tend to also delay the desire for homeownership. But let's see if we're emblematic of our respective generations. What age did you buy your first home, Mark?

Mark Fleming - Well, for me, it was 28. And you, Odeta?

Odeta Kushi - I was 30, almost 31, we should probably go with that. So we're pretty predictable, I think. But you did stay in school for a while.

Mark Fleming - I did stay in school, I just have to point out, it seemed like you were searching for a home since you were, like, 28.

Odeta Kushi - I was gonna say, does that count that I've been looking since I was 28. And finally pulled the trigger.

Mark Fleming - We say this in jest. But, in reality, the decision was made much earlier.

Odeta Kushi - I think that's exactly that. That shows, you know, what kind of times we've been living in, right? The hot housing market and the fact that it took me so long to find something that fit my needs.

Mark Fleming - Exactly. And, for me, I lived in a very different time, because I'm a little older and a very different housing market. It took me not nearly as long - about six months. But, at the time, I had been in college going on another 10 years after my graduation from high school.

Odeta Kushi - So, you're more like a millennial in that sense. You stayed in school for quite a bit.

Mark Fleming - I wished I could have done it perpetually.

Odeta Kushi - Yeah, that's true. All right. So we know that millennials have a lower homeownership rate compared to their generational predecessors. At the age of 30, 42% of millennials own homes compared with 48% of Gen Xers at the same age, yet Millennials have significantly narrowed this gap as they move into a new phase of their lives. At the same age of 40, the millennial homeownership rate is 60%, while Gen X stood at 63.5%.

Mark Fleming - So millennials are buying later in life because they're staying in school longer. But staying in school longer has its benefits. The homeownership rate for millennials with a bachelor's degree in 2021 was approximately nine percentage points higher than those with just a high school degree.

Odeta Kushi - Whew. That's a pretty big gap. And our research finds that the importance of education to homeownership has only increased over time, the impact of educational attainment on the likelihood of homeownership has more than doubled in 20 years. In 2000, the difference in the homeownership rate between those with a high school degree and those with a college degree was nearly 4%. By 2021, this gap more than doubled to 7.5%.

Mark Fleming - I think it's important here to point out that this is after controlling - I'm waving my quote fingers here for the fancy statistical term - for the increased likelihood of homeownership because of higher incomes directly. All else equal, educational attainment increases the likelihood of eventual homeownership, sort of controlling for all these other factors. So millennials pursuit of higher education is good news for the housing market, because it seems that education is not only the key to greater earning power, but also, independently, a key to homeownership.

Odeta Kushi - Just a little bit later than their generational predecessors.

Mark Fleming - And you see how I used a "key" twice there.

Odeta Kushi - Way to go. Very proud of yourself there.

Mark Fleming - But, wait a minute, more education means more student loan debt, right? That must have a negative impact on potential homeownership demand.

Odeta Kushi - Well, yes, but it's not that straightforward. And we talked about this a little bit way back in episode 26, when we took questions from our listeners. And, by the way, you can always submit questions you'd like us to feature by emailing us at economics@firstam.com. So, getting back to the question, does student loan debt prevent millennials from saving for a down payment and, subsequently, prohibit their ability to buy a home.

Mark Fleming - Prohibit is a very strong word. It's a strong word. We did some research using the 2019 survey of consumer finance data, which is the latest year of available data, and found that, as one may expect, over the last 30 years, average student debt increased from $12,600 to $40,600 in inflation-adjusted dollars. More simply, over almost the last three decades, the typical amount of a student loan has more than tripled.

Odeta Kushi - That's a pretty big jump.

Mark Fleming - Yes, but...always one of those with statistics...the percentage of income dedicated to student loan debt repayment each month has, in fact, declined for the average young household. Between 2016 and 2019, the average payment-to-income ratio of a family with a household head between the ages of 25 and 34. Sort of post college, you've come out, you've now got your debt, you've now got a job. That declined from 7.4% to 5.6%. And, the median remained unchanged. The reason? Higher incomes, longer repayment terms and lower interest rates. In other words, while the amount of debt has increased, the monthly cost of paying it back has roughly not.

Odeta Kushi - Right, so the average inflation-adjusted income for young households with student debt increased from about $63,000 to $83,000. Between At 1992 to 2019 period but, much like a mortgage, monthly student loan payments depend on more than just the loan amount and the income of the borrower.

Mark Fleming - The average loan repayment term has increased from seven and a half years back in 1992 to 14 years, most recently, keeping payment-to-income ratios down. Just like going from a 15-year mortgage to a 30-year mortgage allows you to borrow more money for a similar monthly payment, almost doubling the student loan repayment term accommodates more student loan debt for a similar monthly payment.

Odeta Kushi - And then the other piece of this, because during the same time, interest rates have declined. During that same time period from 1992 to 2019, the average annual interest rate on a student loan has declined by two percentage points from about 8% to just below 6%. So longer repayment terms and lower interest rates have resulted in increased, quote, student loan buying power, unquote, if you will, and payment-to-income ratios that have remained steady over time.

Mark Fleming - So student loan debt certainly stacks up because educational debt levels have increased over time, but student loan buying power has increased sufficiently to keep that monthly payment burden from increasing. This could be one of the reasons why student loan debt is more likely to delay, rather than prevent homeownership. And we've already discussed that education does, in fact, pay off.

Odeta Kushi - Indeed, it does. Well, I want to close out the episode by bringing the conversation to a timely topic. The recent plan announced to forgive $10,000 of student loan debt. Now, just a little bit of an explanation here, I won't go into detail too much. But to qualify for the $10,000 forgiveness, individual borrowers must earn less than $125,000 a year, or less than $250,000 a year for couples. Again, we won't go into too much detail, but I will ask the question, could this potentially have an impact on homeownership demand.

Mark Fleming - So, according to the White House, about 45% of borrowers, or almost 20 million people, will have their student debt fully cancelled. And also 95% of borrowers, or 43 million people, would benefit from some sort of debt relief plan as well as, possibly, the cancellation. For potential home buyers who are on the margin, the debt relief could allow them to use that money that was going to pay the student loan debt to save up for a down payment faster. It may also offset some of the affordability loss from rising mortgage rates. Because what once was a student loan payment can now become part of a mortgage payment. And, if you do that for 43 million people, having lower monthly student debt payments or no payment at all.

Odeta Kushi - Yeah, that could boost demand in the housing market for sure. All right. Well, thanks for that great explanation, Mark. I think we're going to close it out on that point. So, thank you for joining us on this episode of the REconomy podcast. If you have an economics-related question you'd like us to feature on a future episode, you can email us at economics@firstam.com. We love to hear from our listeners. And, as economists, you know, we love our metrics and data. So, if you enjoy listening to the podcast, please make sure to give us a rating on your favorite platform. And, as always, if you can't wait for the next episode, you can follow us on Twitter. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

This transcript has been edited for clarity.