Unclear how much student debt is holding back the housing market

The sluggish housing market is likely not helped by the amount of student debt held by young adults:

[T]he Federal Reserve Bank of New York reports today that in 2013, student debtors between the ages of 27 and 30 were less likely to own a home—or, specifically, to have a mortgage—than their peers who were student-debt free. Homeownership rates have fallen fast among all young adults since the recession. But, as shown below, they’ve dropped most precipitously among those who borrowed for school.

6a01348793456c970c01a511b13bd1970c450wi_1Federal Reserve Bank of New York

There’s one key detail this graph leaves out, however, which the Fed shared in a separate report from early last year (and which I’ve written on before). It turns out that, at the end of 2012, borrowers who were current on their student loan payments were actually more likely to take out a mortgage than other young adults. Borrowers who were delinquent on their student loans, however, took out barely any mortgages at all. In other words, young people who already couldn’t handle their debt simply weren’t in the market for houses.

Federal Reserve Bank of New York

A key point: having college debt doesn’t completely stop mortgage originations. So, reducing college debt (and look at the median, not the average) could help free up the housing market but it isn’t the only problem.

I wonder if there isn’t another way to think about this: more young Americans are willing to trade a college degree for homeownership before they are 30. This could be due to a variety of reasons including earning potential due to a college degree but also a decreased interest in owning a home as opposed to accomplishing other goals like living in an exciting place or establishing themselves in a career. In other words, this issue may not really be about college debt holding people back but rather about the relative interest young adults have in owning a house.

State Budget Crisis Task Force: big debt trouble in Illinois

Even if politicians in Illinois don’t talk about this much, outsiders such as the State Budget Crisis Task Force are noticing the debt trouble in Illinois:

For years, Illinois has racked up billions in public debt to plug budget holes, pay overdue bills, and put money into its mismanaged pension funds. And for the people who live there, this has resulted in decrepit commuter trains and buses, thousands of unsound bridges, 200 hazardous dams and one of the most inequitable public school systems in America…

The group, led by the former Federal Reserve chairman, Paul A. Volcker, and the former New York lieutenant governor, Richard Ravitch, recommended an overhaul of Illinois’ budgeting practices, to make it harder to kite money from year to year and raid special-purpose funds. It also warned that tax increases may be in store…

Illinois has the lowest credit rating of the 50 states and has America’s second-biggest public debt per capita, $9,624, including state and local borrowing. Only New York State’s debt is bigger, at $13,840 per capita. But Illinois has not been able to use much of the borrowed money to keep its roads, bridges and schools in good working order, because years of shoddy fiscal practices have taken a heavy toll, the report said…

While many states have heavy debt burdens and unfunded pensions, the task force warned that Illinois’ problems had been building for decades and were advanced. The state was “insolvent” even before the financial crisis hit in 2008, the report said, but that was hard to detect because “budget gimmicks became a standard practice.”

Not exactly a rosy outlook.

This could relate to the discussion at the national level about how the federal government doesn’t have to balance its budget while other levels of government do. Well, states and other government bodies can still mess up the process even if they are “balancing the budget.”

Oddity of Illinois Home Rule allows municipalities to get into a lot of debt

The Chicago Tribune has an interesting piece of how the Illinois oddity of granting Home Rule powers to municipalities starting in 1970 can lead to overborrowing:

The state used to cap how much towns could borrow on the backs of taxpayers. Even for loans under the cap, the state forced cities and villages to put many “general obligation” borrowing deals before voters. The intent was to protect taxpayers from massive debt.

But local officials complained they needed easier ways to borrow. Chicago’s first Mayor Richard Daley led the charge for municipalities to set their own rules. The result was the 1970 Illinois Constitution and a concept that transformed how the city and suburbs are governed: home rule.

It has let towns borrow as much as they want, and raise many taxes, all without direct voter input. Any town with at least 25,000 residents gets the power. Smaller towns can vote it in via a referendum measure…

The vast majority of states — including all of the largest ones — do not offer municipalities such blank checks.

Ken Small of the Florida League of Cities said he would worry if his state had Illinois’ loose rules.

Read on for details on how several Chicago suburbs have accumulated massive amounts of debt.

I don’t think I’ve ever seen any municipal leaders denounce or reject Home Rule powers. Indeed, they tend to accentuate the positive sides of the powers as they allow municipalities more local control and the ability to finance projects on their own rather than having to rely on outside funding. And this would seem to fit with what many suburban residents tend to want as well: more local control, meaning that “big government” doesn’t control everything.

But, as this article suggests, local government officials aren’t necessarily any better at handling financing and borrowing. I was struck by reading this piece and an earlier one featuring the plight of Bridgeview, Illinois that a number of these borrowing situations arose when smaller communities wanted to jumpstart economic development. Struggling to do things on their own, they borrowed lots of money for retail, residential, and entertainment projects intended to bring in more tax dollars through property and sales taxes. A number of these projects didn’t pan out, possibly because of unrealistic hopes and also because the economic crisis made it difficult even for established and more financially stable communities to pursue larger developments. The lesson here? Perhaps slow and steady really is better here as big change for small communities is difficult to attain.

Another issue: the article suggests Chicago led the way to get the 1970 legislative act passed. Were some communities opposed to this or did they get behind Chicago as this could also benefit them?

The Chicago Fire and Bridgeview: another case when building a sports stadium is not a good investment

Residents of the southwest Chicago suburb of Bridgeview are not happy about reports that Toyota Park, built to be the home of the Chicago Fire, has created a lot of debt for the community:

The exchange came Wednesday night at Bridgeview’s first Village Board meeting since the Tribune published a report detailing the small southwest suburb’s financial woes tied to its biggest bet, the 20,000-seat Toyota Park.

The taxpayer-owned home of the Chicago Fire has come up millions of dollars short of making its debt payments since opening in 2006. Meanwhile, the town has nearly tripled property taxes in less than a decade, even as the town offset some of the financial sting by taking out more loans to help make payments.

In all, the blue-collar suburb is now more than $200 million in debt.

In comparing towns’ debt to property values, the Tribune found Bridgeview had the highest debt rate in the Chicago area. Much of the debt is tied to a stadium deal in which the newspaper found insiders landed contracts and town officials enriched their political funds with stadium vendor donations.

The stadium might have helped put Bridgeview on the map (leading to higher status/prestige) as it is the only suburban facility in the Chicago area that is home to a major sports team (despite arguments in the past from the Bears and White Sox that they might move to the suburbs). But this level of debt seems insurmountable for a village of 16,500 people who have a median household income of $42,073, below the national average.

This should be a reminder for many communities, small suburbs or big cities: sports stadiums are not the deals they may be made out to be. Yes, it could bring or keep a major sports team. But, the public debt may take decades to repay, can lead to higher tax burdens for residents who are likely not all attending the games, doesn’t necessarily mean that a host of entertainment businesses will open up nearby to serve stadium patrons, and the primary people who benefit are the sports teams (who get new stadiums for which they don’t have to pay the whole bill) and a small number of local leaders and businesses. It may be nice to mentioned on TV every once in a while (if you can find the more minor channels the Fire tend to be relegated to) and be the politician who helped bring the major team to town but it often isn’t a great deal for the whole community.

Should the American Dream include a McMansion?

Van Jones suggests the American Dream may have once included a McMansion but such hopes have been downgraded in these tough economic times:

We may not be able to save the American Dream from the point of view of, you know, everybody is going to have a McMansion and be rich, but we should be able to make a—have a country where you can work hard and get somewhere. The two big barriers right now are these. It used to be the case that the pathway from poverty into the middle class was go to college and buy a house. Today, those are the trapdoors from the middle class into poverty, because student debt is crushing a whole generation of young people who are trying to make a better life for themselves, and underwater mortgages—one-quarter of every mortgage in America underwater—is dragging people from the middle class into poverty. So the American Dream, so-called, has been turned upside down, inside out.

Isn’t Jones suggesting that the Dream once included a McMansion? If so, this fits with an idea I’ve shared before: McMansions may always have their critics but if the economy turned around and McMansions became more attainable again, they would receive less criticism and people would go back to buying them. At the peak of the housing market in the mid-2000s, you could find plenty of people who vocally shared their reasons for disliking McMansions. However, this criticism has been backed in recent years by a narrative that McMansions (along with SUVs and perhaps Starbucks lattes) either exemplify or brought down the crashed American economy and we should say away from these houses in the future.


The median college loan debt: $12,800

Growing calls for ways to deal with college loan debt can lead to a statistical question: just how much does “the average” college student owe? Here are some of the figures:

Meet Kelli Space. She went to Northeastern University to get a degree in sociology. And she graduated in $200,000 of student loan debt. In the economy’s newest trillion-dollar crisis, she is the 1 percent.

Kelli is not the face of America’s student debt problem. Among the 37 million people in this country with student loans to pay off, the median balance is $12,800. A whole 72 percent of borrowers have less than $25,000 left in debt, according to data from the Federal Reserve Bank of New York.

No, students like Kelli are the rarities, the white rhinos. Only about 5 percent of borrowers owe more than $75,000.

The key figures for me: the median is $12,800, meaning that half of people with student loans have less than this figure, half have more. Yet, nearly three-quarters of those with loans have less than $25,000 to pay off. Only 11% have more than $50k in debt.

So why do we keep hearing stories about those who owe mega amounts of money? Perhaps we might think of them as canaries in the mine shaft, students who show how bad the college finance system might be today. But, on the other hand, the statistics suggest that these students are rarities, people who have unusual debt. From these anecdotal and relatively rare stories, it seems like there is a pattern: a student goes to a prestigious school banking on the name of the school to pay off. (One common argument you will find online is that the major should be blamed – this usually puts more creative disciplines, the humanities, and subjects like sociology at the center of blame.) But, the name doesn’t always pay off, the student can’t find a good enough job to start paying off these debts, and the interest just continues to grow.

Overall, we need to work with the statistics more than the anecdotes: most college students do not have more than $25,000 of debt. This is not a small amount but it can be tackled (though the economy doesn’t help).

McMansions as debtor’s prisons

While arguing for tiny houses, Jay Shafer argues that McMansions are comparable to debtor’s prisons:

“I see myself as freeing people,” Shafer says. “McMansions are like debtors’ prisons for the 21st century. Why pay for all that space that you’re not using, for the heating and maintenance, if it doesn’t make your life better?”

Indeed, researchers have discovered that many people bought big houses without any idea of what they’ll actually do with the room, and ended up living in just a small portion of their costly domiciles. In the quest to fill up the spaces with big-screen TVs and sectional sofas and bric-a-brac, many ended up succumbing to what one market researcher has termed a “claustrophobia of abundance.”

Shafer has a better idea. Sell the Xanadu, get rid of a lot of your stuff, and invest $50,000 or so from the proceeds in an elfin dwelling mounted on wheels, so that it technically qualifies as a vehicle and thus gets around the minimum-size constraints of zoning laws. Put it on a tiny parcel, ideally in some picturesque location on the outskirts of suburban sprawl, perhaps in a location where you can appreciate a little bit of nature.

Two things are interesting here:

1. I’m not sure I understand the comparison to debtor’s prisons. I understand that buying a McMansion can require taking on a lot of debt but debtor’s prisons were quite unpleasant places (some mention here). Are McMansions really that bad?

2. So it is okay if tiny houses contribute to suburban sprawl? I’m intrigued by the last line: you can park your tiny house on the edge of the metropolitan region, and live in nature while still being close to a lot of amenities. The problem, then, is not suburbia per se but rather the oversized houses. Would critics of sprawl be satisfied with this trade-off?

And I also have two questions:

1. Do tiny houses work for families?

2. Has anyone come up with a way to connect tiny houses so you can have a bigger house but that is still movable?

The “value of estimating”

Here is another way to help students develop their mathematical skills: learn how to estimate.

Quick, take a guess: how tall is an eight-story building? How many people can be transported per hour on a set of train tracks in France? How many barrels of oil does the U.S. import each year?

Maybe you gave these questions your best shot – or maybe you skimmed right over them, certain that such back-of-the-napkin conjecture wasn’t worth your time. If you fall into the second, just-Google-it group, you may want to reconsider, especially if you’re a parent. According to researchers who study the science of learning, estimation is the essential foundation for more advanced math skills. It’s also crucial for the kind of abstract thinking that children need to do to get good grades in school and, when they’re older, jobs in a knowledge-based economy.

Parents can foster their kids’ guessing acumen by getting them to make everyday predictions, like how much all the items in the grocery cart will cost. Schools, too, should be giving more attention to the ability to estimate. Too many math textbooks “teach how to solve exactly stated problems exactly, whereas life often hands us partly defined problems needing only moderately accurate solutions,” says Sanjoy Mahajan, an associate professor of applied science and engineering at Olin College…

Sharpen kids’ logic enough and maybe some day they’ll dazzle people at cocktail parties (or TED talks) the way Mahajan does with his ballpark calculations. His answers to the questions at the top of this story: 80 ft., 30,000 passengers and 4 billion barrels. To come up with these, he guessed at a lot of things. For instance, for the number of barrels of oil the U.S. imports, he made assumptions about the number of cars in the U.S., the number of miles driven per car per year and average gas mileage to arrive at the number of gallons used per year. Then he estimated how many gallons are in a barrel. He also assumed that imported oil is used for transportation and domestic for everything else. The official tally for U.S. imports in 2010 was 4,304,533,000 barrels. Mahajan’s 4 billion isn’t perfect, but it’s close enough to be useful – and most of the time, that’s what counts.

It sounds like estimation helps with problem solving skills and taking known or guessed at quantities to develop reasonable answers. I tried this question about the barrels of oil with my statistics class today and we had one guess of 4 billion barrels (among a wide range of other answers). This also suggests that there is some room for creativity within math; it isn’t all about formulas but rather takes some thinking.

This reminds me that Joel Best says something similar in one of his books: being able to quickly estimate some big figures is a useful skill in a society where statistics carry a lot of weight. But to do some of this, do people have to have some basic figures in mind such as the total population of the United States (US Census population clock: over 312 million)? Is this a commonly known figure?

The article also suggests ways to take big numbers and break them down into manageable and understandable figures. Take, for example, the national debt of the United States is over 15 trillion dollars, a figure that is perhaps impossible to comprehend. But you could break it down in a couple of ways. The debt is slightly over $48k per citizen, roughly $192k per family of four. Or you could compare the debt to the yearly GDP.

Why paying off all of the American debt in the early 2000s might have caused problems

Many people would suggest that the United States needs to tackle its growing debt problem. But a government report from the early 2000s suggests that paying off all the debt could have some negative consequences:

If the U.S. paid off its debt there would be no more U.S. Treasury bonds in the world…

But the U.S. has been issuing bonds for so long, and the bonds are seen as so safe, that much of the world has come to depend on them. The U.S. Treasury bond is a pillar of the global economy.

Banks buy hundreds of billions of dollars’ worth, because they’re a safe place to park money.

Mortgage rates are tied to the interest rate on U.S. treasury bonds.

The Federal Reserve — our central bank — buys and sells Treasury bonds all the time, in an effort to keep the economy on track.

If Treasury bonds disappeared, would the world unravel? Would it adjust somehow?

“I probably thought about this piece easily 16 hours a day, and it took me a long time to even start writing it,” says Jason Seligman, the economist who wrote most of the report…

In the end, Seligman concluded it was a good idea to pay down the debt — but not to pay it off entirely.

So which party or movement would support this? Would it be best to have a more flexible debt (small to large depending on the more immediate economic circumstances) or would it be better to have a more stable, small amount of debt?

I don’t know the intricacies of how this might all play out but it is a reminder of the globalization of finance: doing something that might be viewed as desirable in the United States would not only affect other sectors of American life but how other countries can operate. It would be interesting to know how we got to this point. Does every major country basically have some debt that other countries are counting on?

Conservatives getting behind mortgage modifications?

A journalist argues that conservatives are starting to argue that the federal government should step in and help homeowners stay in their homes:

Mortgage modifications have been a key pillar of the progressive response to the economic downturn–and they’ve been one focus of the Occupy protests that have sprung up across the country lately. The Obama administration offered its own such program in 2009, though it has helped far fewer homeowners than anticipated, thanks to a flawed design. But until lately, conservatives had by and large opposed the idea, arguing, as Santelli did, that taxpayers shouldn’t be forced to pay for borrowers’ bad decisions, and that banks shouldn’t have their actions constrained by government.

So what’s changed? By and large, policy hands and political leaders alike recognize that the economy isn’t going to get better on its own, at least not any time soon,. There’s a widespread consensus that until the United States tackles the massive overhang of housing debt–American homeowners’ wealth has fallen by a stunning 40 percent since 2006–the economic recovery won’t gain steam. As Feldstein wrote: “The fall in house prices is not just a decline in wealth but a decline that depresses consumer spending, making the economy weaker and the loss of jobs much greater.” Rogoff, too, views the crushing volume of personal debt as an unaffordable drag on growth. “Simply put, you can’t operate an economy where huge numbers of people are desperately in debt and have no real way out,” he argues.

Hubbard originally offered a modification plan in 2010 as a way to avoid another “costly stimulus package” designed to spur consumer demand. But he, too, may also recognize that mortgage modification, though necessary for the health of the economy, is likely to be politically unpopular. If so, better to have President Obama take the hit, rather than a future Republican president—like, say, President Romney.

Of course, right and left don’t see entirely eye-to-eye on the issue. Dean Baker, an economist with the liberal Center for Economic and Policy Research, last week slammed Feldstein’s plan as too soft on banks and a bad deal for struggling homeowners. And it’s hard to imagine that Republicans in Congress would react favorably to an aggressive mortgage modification proposal from the Obama administration.

So if this is true – and “three instances” doesn’t a trend make even as this journalist suggests – what is happening?

1. Conservatives are recognizing that the mortgage debt is holding up the larger economic recovery. If people can’t move, they can’t go to the open jobs. The debt doesn’t allow them to spend on other consumer items. If government involvement can move people past this logjam, then the “free market” can work again. Desperate times mean that political ideology has to be bent a little.

2. As the journalist suggests, they only back this when a Democrat is in charge.

3. This is pandering for votes. American culture has a dream of homeownership – neither party wants to be against that.

This bears watching. Of course, the devil is in the details: who is actually going to support what? Who is going to pay for this? How many homeowners could be helped?