Economist: Student debt tied to U.S. home sales lag

U.S. student loan debt totaling more than $900 billion may be hurting home sales, said Neal Soss, chief economist at Credit Suisse in New York.

Soss, in a radio interview on “Bloomberg Surveillance” with Tom Keene, said higher requirements for down payments and rising debt of college graduates are preventing younger potential buyers from entering the housing market.

“We are trying to migrate towards a much safer underwriting standard, with let’s say 20 percent down payments required,” Soss said. “It takes a certain amount of time for people to save that up, and the more they’re burdened with student loans the less possible it is for them to accumulate that chunk of liquid capital that allows them to make that.”

Sales of previously owned U.S. homes unexpectedly declined in June to an eight-month low, showing the recovery in residential real estate will take time to develop. In 2011, first-time home buyers, with a median age of 31, fell to the smallest percentage of total home purchasers since 2006, according to data from the National Association of Realtors. Their median income climbed 6.5% from 2006 to 2010, compared with a 13% gain for repeat buyers, the figures show.

“There is a link,” Soss said when asked about the impact of student debt on home sales. He said it was “a little too strong” to see a straight-line connection between the two.

Total student loan debt rose to $904 billion in the first quarter, from $874 billion three months earlier, according to the Federal Reserve Bank of New York. College undergraduates from the class of 2010 on average left school with $25,250 in student loan debt, according to The Institute for College Access & Success in Oakland, California.

Commerce Department figures due tomorrow (July 25) may show new-home purchases climbed in June to a 371,000 annual rate, little changed from the prior month’s 369,000 pace, according to the median in a Bloomberg survey.

Soss also said that there is “plenty of time” before the November elections for the Federal Reserve to take additional action to stimulate the economy. The Credit Suisse chief economist defended the non-partisan character of the Fed and said it may not act immediately before the election, but during the August or September meeting.

“They’ll do what they think is right for the country — independent,” Soss said.

The Fed is buying Treasuries as part of its program to replace $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

Fed Chairman Ben Bernanke testified to Congress last week that the central bank is evaluating additional steps to create jobs and reverse an economic slowdown, including buying mortgage bonds or changing language for its policy outlook.

Unemployment hasn’t dropped below 8% even though the central bank has held its main interest rate near zero since December 2008 and purchased $2.3 trillion in bonds. Policy makers plan to meet July 31-Aug. 1.

Federal Reserve Bank of Chicago President Charles Evans has called on the Fed to commit to low interest rates until the unemployment rate falls below 7% or inflation rises above 3%.

“Frankly in my view, setting a target that you can’t achieve is not the kind of thing that builds confidence,” Soss said.