The Debt Impacting Home Purchasing Power

With student debt reaching a record level this year, prospective homebuyers are finding it harder to save for a down payment and are finding their budgets can be tight when shopping for a home. For the average student debt holder, their home purchasing power is about $92,440 lower than home shoppers who are not carrying student debt, according to research from Zillow.

Student debt reached a record $1.56 trillion in the third quarter of this year, and according to Zillow about a third, 33.9 percent to be precise, of renting households planning to purchase a home in the next year have student debt.

Among renters with student debt, the average monthly debt payment is $388, according to the research released Thursday.

Based on metro level median incomes and home values alongside average student debt obligations, Zillow estimated that renters with student debt can afford about 52.3 percent of today’s housing stock without spending more than 30 percent of their income combined on mortgage and student debt payments. Those free from student debt can afford 66.4 percent of homes.

In terms of home prices, renters paying off student debt can afford homes priced up to $269,400, while those without student debt can afford a home priced at $361,800 or lower.

Additionally, Zillow noted, “Even before it limits the number and price of the homes renters can afford, student debt makes it harder to set aside money for a down payment, which is one of the top barriers to homeownership in the eyes of renters.”

When examining the impact of student debt at the metro level, Zillow found it was most detrimental to home purchasers in Las Vegas, where renters with student debt can afford 29.3 percent of homes for sale, on average, while renters without student debt can afford 57 percent of homes currently for sale.

On the other hand, student debt made the smallest difference in purchasing power in San Jose, California, where affordability is pretty low for all renters. Here, renters with student debt can afford 11.7 percent of homes, while renters with no student debt can afford 18.7 percent of homes for sale.

Among the major metros observed, local student debt holders can afford the highest percentage of homes in Cleveland, Ohio. In this metro, an average renter carrying student debt can afford 69.8 percent of homes currently listed for sale.

At the other end of the spectrum, student debt holders currently renting in the Los Angeles metro can afford just 6.3 percent of homes for sale in their area.

“Higher education pays off when it comes to lifetime earnings and the long-term odds of homeownership, but carrying any kind of debt limits how much home buyers can afford,” said Aaron Terrazas, Senior Economist at Zillow.

Terrazas also pointed out that, "With for-sale supply still tightest for the most affordable homes but increasingly available at higher prices, even a small reduction in a buyer's target price point can result in substantially fewer options."