Welcome to summer! Fortunately, we avoided the apocalypse that a crackpot astrologer (redundant) predicted last night when the full moon coincided with the summer solstice. I know you’re all as relieved as I am. Now, on to the news:
Lead Story… I recently read two studies that came out in the last week or so that appear contradictory, at least on the surface. First off, the National Association of Realtors and SALT published a survey that strongly suggests that student debt is holding back the housing market:
Seventy-one percent of non-homeowners with debts from student loans said the burden of those monthly payments was keeping them from buying a home. More than half said it would likely continue do so for more than five years, according to a new study by the National Association of Realtors and SALT, a consumer literacy program provided by nonprofit American Student Assistance.
Second, John Burns Real Estate Consulting posted a story on their blog about rising college graduation rates are contributing to income inequality:
Rising college graduation rates, particularly for women, have significantly contributed to a greater share of high-income households. Among married couples, 23% now both graduated from college—a percentage that has steadily risen for decades. When both spouses went to college and work, household incomes at the top rise!
Consumer spending data provides strong support to the JBREC hypothesis of college education contributing to income inequality:
So which one is it? Is college debt holding graduates back and not allowing them to take place in the “American Dream” of owning their own home or is the rising percentage of couples where both have a college education (and probably a bunch of student debt) leading to out-sized earnings for a percentage of the population? I would contend that it’s both. First off, we need to distinguish between cost and return. Yes, college is expensive – arguably too expensive seeing as it’s cost has far outrun inflation for a long period of time. However, if we are making the case, as the Realtor study is that college debt is holding back the housing market then we have to ask a simple question: what, is the alternative? That’s where the problem lies. Sure there are tech founders that didn’t graduate college only to become billionaires but they are extreme outliers, pure originals that can’t be replicated. If they weren’t outliers, by definition they would never be able to earn that type of out-sized return. Unfortunately, not everyone is able to change the world, even if they all got a trophy in youth soccer. If a student isn’t independently wealthy enough to not take on debt (a proposition similar to winning the lottery – pure luck), the alternative is not to go to college. Statistically speaking, that is a horrible bet. This piece of Study.com sums it up perfectly:
Considering the high cost of a college education, potential students may question whether the expected earnings after graduation outweigh the possible debt incurred from student loans. In 2002, the Census Bureau looked at lifetime earnings of employees with bachelor’s degrees and those without for 1999: non-degree holders could expect to earn 75% less than bachelor’s degree holders, who could expect to earn $2.7 million over their lifetimes. However, since 1999, bachelor’s degree holders can now expect to make 84% more than high school graduates.
As the above numbers, and the JBREC study show, college is becoming more and more of a necessity to get ahead in the modern world. If you want to join the middle or especially upper-middle class, a high school degree is not going to get you there (unless of course you happen to be the aforementioned tech genius/ future billionaire). Yes, the debt is a necessary evil with an important caveat: not all colleges or all majors within a college are created equally and that’s where I believe that studies like the NAR one are in error: they overly generalize a very complex issue.
The seventy one percent referenced in the NAR study is an eye-popping number but there are a few issues with the way that the study was conducted: 1) There is a no segmentation (at least none was provided in what they published). For example, the results aren’t sorted based on whether the respondent attended a 4-year college, a 2-year junior college or a for-profit college let alone what their course of study was. 2) There is no differentiation made between those that received a college degree and those that took out loans but did not complete a degree. It’s easy to see where this is problematic. I highly doubt that student debt is as large of an issue for an engineering grad from a top school as it is for a someone who dropped out of a for-profit college before receiving a degree. Alas, we don’t know from this study since the data wasn’t provided.
Yes, the rate of increase in the cost of a college degree in recent decades has been massive. However, if looked at strictly from an economic standpoint, the yield on investment is still quite good, IF you graduate AND and chose a major that will get you somewhere other than flipping burgers or spending your time at political rallies asking for debt forgiveness (yes, I know that was a cheap shot). The primary reason is that the baseline for comparison: a high school degree provides little if any earning power even when debt is taken into account. Like it or not, many jobs that previously required only a high school degree now require college. So when will college cost begin to moderate? IMO, it’s when the return on investment no longer justifies the outlay. You can already see this happening in for-profit schools which have proven over time to be a poor investment for students which is why their stock performance has been utter crap. As a further illustration, here are the 25 colleges with the best Return on Investment and the 25 colleges with the worst ROI.
The NAR study is factually correct: every dollar of additional debt that you take on be it student or otherwise will indeed make it more difficult to qualify for a mortgage. However, if one graduates with a worthwhile degree, that debt should still be a good investment over time and make the borrower more likely to be able to purchase a house than the alternative of not taking 0n debt by not attending college at all. It’s a shame that the NAR data didn’t include a further breakdown because it would have made for a far more interesting story than the shocking 71% number. It’s almost as if they had an agenda here….
What Gives? Gregory Mankiw of New York Times on five possible reasons for our sluggish economy.
Cream of the Crap: The US economy is doing great….compared with pretty much everywhere else. See Also: Swiss government debt now has a negative yield all the way out to 33 years, which makes even Japan look good in comparison.
The Fed Who Cried Wolf: The Federal Reserve has spent the last few months saber-rattling about imminent interest rate hikes only to backtrack at their monthly meetings. The act is getting old and they are now at risk of losing investor faith in their policy rate path.
Demographics Are Destiny: This animated demographics chart from Calculated Risk is almost mesmerizing to look at.
Refi Madness: America’s malls have been on the ropes for quite some time and would have plenty of issues even if they were not leveraged at all. Unfortunately for their owners, they have billions in debt coming due.
Storm Clouds: PIMCO sees a potential downturn in the next 12-months for U.S. commercial real estate as tightened regulations, a wall of debt maturities and property sales by publicly traded landlords take their toll.
It’s Complicated : Morgan Housel of the Motley Fool is one of the best financial writers in the world. He has also long been a critic of the concept of a home as an investment. Recently he and his wife bought their first home after they started having kids. I think this assessment of the complicated nature of the home buying process and it’s impact on transaction fees is spot on:
I consider myself reasonably astute in personal finance, because it’s so much of what I write about for a living. But I can’t count how many times I had to stop, realize something confused me, and spend an hour of research to understand what I was about to sign. After going through our loan documents I sent at lest 10 emails to the bank with various forms of, “What’s this?” What is this?” “WHAT IS THIS?”
Even with a realtor, home buyers need to be amateur lawyers to fully understand what they’re doing. I can’t imagine what it’s like for people for whom finance is already a daunting topic. And that’s most people.
This probably explains why transaction fees are still high. When you combine emotion with legalese, the path of least resistance is to just sign your name without considering what you’re doing. I had a few moments of, “They wouldn’t be offering me this if it wasn’t in my best interest” only to stop, want to slap myself, and keep researching.
For a Price: Multi-family landlord’s are offering free rent as a concession in San Francisco as a flood of units finally hit the market but you can’t get it unless you can afford a luxury apartment (h/t Jeff Condon). See Also: San Francisco’s housing mania may finally have reached it’s limit. And: Luxury housing demand appears to be on the wane.
Hero: Meet the hacker who is fighting ISIS by spamming their Twitter accounts with porn.
Worker’s Paradise: Venezuela’s descent into failed state status where citizens fight in the streets for food is even worse when you consider that, based on it’s vast natural resources it should be one of the wealthiest countries in the world.
Bird Hunting: After Microsoft purchased Linkedin, the next question in Silicon Valley is who will buy perpetually-struggling Twitter.
Chart of the Day
A couple of fascinating graphics from JBREC. It amazes me that still only 23% of the married population consists of couples who both have degrees.
What a Gas: Activists are planning a “Fart-In” at Hillary Clinton’s DNC acceptance speech this summer in Philadelphia (h/t Steve Sims).
All the Rage: England’s newest fitness craze known as Tantrum Club involves screaming obscenities and popping balloons with bad words written on them while stomping on bubble wrap. This is right up there with the Shake Weight when it comes to dumb workout fads.
Keeping up with the Floridians: An obese naked man was videotaped relieving himself outside of a Georgia Waffle House in broad daylight. When asked for comment, a spokesperson for Florida replied “see, it’s not only us.”
Boom: A group of arsonists set off fireworks in a Walmart in Phoenix leading to the building needing to be evacuated. Fortunately, someone had the good sense to videotape it.
Landmark Links – A candid look at the economy, real estate, and other things sometimes related.
Visit us at Landmarkcapitaladvisors.com