Student Loan Forgiveness & CRE

President Biden announced a student loan forgiveness plan on August 24 that would eliminate up to $10,000 of federal debt for most borrowers and up to $20,000 for Pell Grant recipients. With this plan, about 45 percent of borrowers, or almost 20 million people, would have their student loan debt fully canceled. This has stirred a lot of conversation within the CRE industry and investors are growing weary about the amount of spending that can raise demand and increase inflation. Theoretically, the amount of debt forgiveness could motivate would-be homebuyers to enter the homebuying market or consider planning for property ownership. However, this may cause a ripple effect for multifamily properties and impact the for-rent market as renters become owners.

According to a poll, 72% of non-homeowners say student loan debt is delaying their ability to buy a home.

Impact on Homeownership

On top of record lows in housing inventory unable to meet current demand, the average price of a single-family house has risen to about $423,000, a $50,000 increase from the previous year’s median price of $373,000, according to a report from the National Association of Realtors. Any benefit to borrowers with a lower debt-to-income ratio from the forgiveness is greatly overwhelmed by increases in mortgage rates. In addition to spiking rates, saving up for the down payment of a house could also take a long time. This overall unaffordability of homes results in people postponing their homebuying decisions, consequently boosting the currently active apartment market throughout the country.

Concluding

President Biden’s executive action regarding student loan forgiveness could positively impact homeownership in the long run, but the amount being forgiven may not be enough to make a significant impact. Only about a quarter of student loan borrowers have less than $10,000 in outstanding debt, with the average around $30,000. However, with less debt, Americans will be more inclined to spend money which can benefit companies across a variety of sectors. People want to own houses and cars, so less debt means more incentive to invest in building the lives they want.

Furthermore, whether the plan will impact housing prices, which are already facing downward pressures, major impacts will depend on mortgage rates and the number of student debt holders who are able to purchase a home who otherwise could not have absent the debt forgiveness.