CHICAGO--(BUSINESS WIRE)--Rising student loan balances, stagnant real wages, appreciation in home prices and more conservative underwriting standards are combining to keep millennials from participating fully in housing-driven wealth creation, says Fitch Ratings.
"Most older Americans have relied heavily on home equity growth as an important source of wealth creation throughout their lives," said Bill Warlick, Macro Credit Research Senior Analyst. "Millennials are facing some bigger obstacles, such as higher student loan debt and slowly-rising incomes, making it harder to jump on to the housing wealth ladder."
Fitch's comparison of cash flows for two hypothetical recent college graduates shows that a monthly student loan payment of $203/month, the 2016 median according to the Federal Reserve Bank of Cleveland, would result in $45,000 less in mortgage loan capacity. Over 40 million people now hold student loans.
Home equity, for the median household, represented approximately 70% of total net worth for homeowners age 65 and older in 2011, according to Census data. But this may change over the next 20 years, particularly if home ownership rates for younger Americans continue to fall. Furthermore, housing's role as a key driver of wealth accumulation could diminish if increases in historically low interest rates or changes in pro-housing tax laws slow house price appreciation. Such changes would likely lead to shifts in consumption and savings patterns that may have broader implications for U.S. growth.
The cost of higher education in the U.S. has grown at an average of 5.4% annually since 2000, more than double the 2.2% average annual consumer price inflation rate. As the number of graduates with student debt and the average debt burden have grown, stagnant wages have also crimped millennials' ability to save for a down payment. During 2007-2015, average student loan balances for all borrowers surged 60%, compared with nominal wage growth for recent university graduates of just 13%.
Longer-term, delays in purchases or decreasing homeownership rates raise a number of questions about the economic consequences of generational spending shifts, including consumers' spending mix, savings rates, and related demographic variables like marriage and birth rates.
The full report, 'Falling Off the Generational Wealth Ladder: More Obstacles for Younger Americans in a Housing-Based Economy,' is available at www.fitchratings.com.
Additional information is available at 'www.fitchratings.com'.
Related Research
Falling Off the Generational Wealth Ladder (More Obstacles for Younger Americans in a Housing-Based Economy)
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