The student loan relief plan could help increase home ownership for previously indebted buyers. But for investors waiting for new housing demand to materialize, patience will be in order.
The Biden administration said in August it would forgive up to $10,000 in federal debt for non-Pell Grant recipients earning less than $125,000, and up to $20,000 for those who received a Pell grant earning below this threshold. Other measures include continuing a pause on student loan repayments until the end of 2022 and capping borrowers’ monthly payments at 5% of their discretionary income, up from 10%.
The move — which the White House says could completely cancel debt for 20 million people — could help borrowers save for a home, President Joe Biden said in a speech in August. “All of this means that people can finally start to get out of this mountain of debt to pay their rent and their utilities, to finally think about buying a house or starting a family or starting a business,” Biden said.
The housing market could see a “potential tectonic shift in demand” from the student loan relief package, Raymond James analyst Buck Horne wrote in a report in late August. Horne estimated that an additional 2.5 million first-time buyers could enter the housing market after debt cancellation. Given the approximate household size, these buyers represent additional demand of about 1.5 million units, the analyst wrote.
The measures could improve first-time buyers’ chances in the housing market by reducing a potential buyer’s debt-to-equity ratio, a key consideration for home loan approval, and increasing a buyer’s ability to save for a down payment, says Jung Hyun Choi, senior research associate at the Urban Institute’s Housing Finance Policy Center.
It’s likely that for at least some of the borrowers affected by the plan, student loan debt was a major factor in putting off buying a home. Just over half of all non-homeowners surveyed last year by the National Association of Realtors said student loan debt was delaying their home purchase.
But these positive elements could be offset in the short term by difficult conditions in the housing market. “The biggest challenge in today’s housing market is the lack of supply,” says Choi of the Urban Institute.
Active listings in August, while an improvement from a year earlier, were about 42% lower than August 2019, according to data from Realtor.com. (Barrons and the company that operates Realtor.com are both owned by News Corp.)
The higher cost of buying a home is another headwind for first-time buyers, who have been hit hard by rising mortgage rates and home prices. In the second quarter of 2022, the National Association of Realtors index that tracks housing affordability for first-time buyers was at its lowest level since 1985.
Although the measures will reduce the debt of potential buyers, “it will not change the situation with regard to housing affordability or the ability to obtain a very short-term loan“, says Mark Zandi, chief economist at Moody’s. Analytics. “The impacts will be felt over the next decade or two years.”
Analysts say as these buyers enter the market, some companies will benefit more than others. In an Aug. 29 policy note, UBS analysts said
(ticker: DHI), the nation’s largest public builder, may perform better in a housing market hampered by affordability issues.
“The size and scale of the business is unprecedented, as is its ability to compete on price,” the analysts wrote. “The plan could also boost demand for home renovations, benefiting
(MAS), the parent company of brands such as Behr Paint and Kichler Lighting, the analysts wrote.
Demand for homes means demand for mortgages — and some loan originators may capture those buyers better than others, analysts say. Companies that issue Ginnie Mae-backed loans, such as FHA and VA loans, are best positioned to benefit, a team of BTIG analysts wrote in an Aug. 29 report.
“We expect the administration’s student debt relief proposal to gradually incentivize homeownership, particularly among those between the ages of 26 and 39, where most of the debt relief should be focused,” wrote the analysts, who said the originator of the loan
PennyMac Financial Services
(PFSI) is best placed to benefit from change, with initiators like
Write to Shaina Mishkin at [email protected]