Recent College Grads: How Are They Doing?

One day historians will be ever so grateful that the National Center for Education Statistics initiated a longitudinal survey of college graduates just as the Great Recession set in. The Baccalaureate and Beyond survey will be checking in every few years with a national sample of young adults who earned their bachelor's degree in the 2007–08 academic year. The first follow-up was released today, with a look at the status of those 2007–08 graduates in 2009.

When the National Center for Education Statistics designed the survey, its intent was not to measure the impact of the Great Recession on the nation's most promising young adults. But that is what the survey is doing. The findings are not reassuring:

• The 66 percent majority of 2007–08 college graduates borrowed money to pay for their education. 
• The average cumulative amount borrowed was $24,700. 
• One year after graduation, 84 percent were employed, but only 57 percent had one full-time job. 
• Among those employed full-time in 2009, their median income was only $36,000.

Source: National Center for Education Statistics, 2008-09 Baccalaureate and Beyond Longitudinal Study (B&B:08/09): A First Look at Recent College Graduates

House Prices and Economic Mobility

Rising house prices allow homeowners to invest more in their teenage children. A study by the Federal Reserve Bank of Boston examined whether children who turn 17 when house prices are rising, and whose parents are homeowners, do better than other children--such as the children of renters or children who turn 17 when house prices are flat or falling. They do. That's because their homeowner parents can--and do--use their growing home equity to help pay for college. Children who turn 17 during a time of rising house prices are more likely to graduate from college, take on less student debt, and earn more as adults.

Source: Federal Reserve Bank of Boston, House Price Growth When Kids are Teenagers: A Path to Higher Intergenerational Achievement?

How Many Used a Pawn Shop?

Percentage of Americans who have done the following in the past five years...

Used a pawn shop: 8%
Gotten an advance on a tax refund: 8%
Taken out an auto title loan: 7%
Taken out a "payday" loan: 5%
Used a rent-to-own store: 5%
Used one of the above methods: 23%

Source: Americans' Financial Capability, NBER Working Paper 17103, $5

Why the Housing Market is (Still) Collapsing

Last week the federal government proposed stricter limits on mortgage lending. For anyone over the age of 50, the new rules sound a lot like the old rules: a 20 percent down payment to get the best mortgage rate, and total debt payments not to exceed 36 percent of household income. The new regulations will be good for the housing market of the future. Unfortunately, they will further destabilize the structurally unsound housing market of today.    

A little bit of history. Beginning in the mid 1990s, the United States experienced a unique confluence of events: a housing market that was growing because of the aging of the baby-boom generation into the peak home-buying age groups and relaxed mortgage lending rules. If only the regulators had let well enough alone and allowed boomer demand to drive homeownership to historic heights. But that wasn't good enough for some, so the market was juiced with easy credit. Kaboom! Homeownership rates and housing prices soared, creating a housing market with the structural integrity of Tinkertoys. It was bound to collapse and it did. But, like a game of Angry Birds, the collapse is not yet complete. A greatly weakened housing market is straining to stand but destined to fall because of the demographics. To be blunt, there is no good news for housing in the demographic trends. Let's examine them generation by generation.

Millennials: Not Buying. The large millennial generation has now filled the 30-to-34 age group, when homeownership becomes the norm. If housing had not been juiced with easy credit, millennials would be buying homes and stabilizing the market. But falling prices, unemployment, and job insecurity are driving them away, undermining the foundation of housing. According to the Census Bureau's latest geographic mobility report, the number of people who moved because they wanted to own rather than rent fell by a whopping 53 percent during the past five years--from 3.7 million in 2004-05 to 1.7 million in 2009-10. Between 2004 (the year the homeownership rate peaked) and 2010, the homeownership rate of householders aged 30 to 34 declined more than any other--down 5.8 percentage points to 51.6 percent. The rate is still falling. As of the first quarter of 2011, only 50.3 percent owned a home. Even if they want to buy, bigger down payment requirements and student loans (37 percent of householders under age 35 have student loans) will prevent many from getting a mortgage.

Generation X: Underwater. No one has been hurt more by the housing crisis than Gen Xers. They were most likely to buy homes when prices were peaking, and they are most likely to be underwater today. According to a Pew survey, 21 percent of homeowners with a mortgage were underwater in 2010. The percentage was 25 percent among 30-to-49-year-olds. With housing prices continuing to decline, the number who are underwater is growing. Trapped in their expensive homes, the mortgage interest payments of householders aged 35 to 44 are an astounding 66 percent above average, according to the Consumer Expenditure Survey. This generation will not be moving up, another lethal crack in the structure of today's housing market. 

Boomers: Downsizing. Each year 2 million homeowners aged 45 to 64 move, joining the growing ranks of Americans who are losing money on their biggest investment. According to Zillow, 37 percent of homes sold in April 2011 went for less than their purchase price, not to mention the target price boomers had in mind when they planned their empty-nest and retirement years. Those movers may be the lucky ones, able to unload their white elephants ahead of the crowd as their peers create an increasingly top heavy and unstable housing market. According to the 2010 Del Web Baby Boomer Survey, 42 percent of 50-year-olds and 32 percent of 64-year-olds plan to move when they retire. Many will have to change their plans.  

Older Americans: Indebted. Once upon a time, it was the norm for older Americans to be debt free. Today, millions of householders aged 65 or older are in debt. Twenty-seven percent of homeowners aged 65 or older had a mortgage in 2009, according to the American Housing Survey, up from 18 percent ten years earlier. The Survey of Consumer Finances finds fully 62 percent of householders aged 65 to 74 having debt (including mortgage and other types of debt), owing a median of $48,100. The debtors probably planned at one time to sell their house and pay off their obligations. Oops! Now their wealth is frozen, creating financial hardship and threatening the inheritance of the next generation--another crack in the structure of the housing market.  

Like I said, there is no good news for housing in the demographic trends. 

For much more about homeowners, renters, and the housing market, see the all new 3rd edition of Americans and Their Homes. 

What is Wrong with this Article?

"New Households Form at Fastest Rate Since '07 in Resurgent U.S.," headlined a recent Bloomberg article. The premise of the article: pent-up demand for independent households among young adults who have been doubling up with mom and dad is going to boost housing starts in the near future.

No doubt there is pent-up demand for independent housing among young adults, but at best they will become renters not owners. The market for new homes is not likely to recover anytime soon and perhaps not in our lifetime. Unemployment, student loan debt, and depressed wages have shaken the middle class, and the epicenter of the quake is among young adults. At this point, we are only beginning to see the extent of the destruction, and the ground is still shaking.

Yet the experts insist that business as usual is just around the corner. Comments one economist in the Bloomberg article: "The demographic component of housing demand is strong: it's just the economic and psychological components that are holding things back." So, it's just the money and the abject terror--no biggie.

"At some point, housing starts will likely take off in a big way," comments another expert. "I just do not think that Americans will settle for living in more crowded homes."

Settle? Settle? Do they think money grows on trees? Until the housing industry wakes up to the fact that its interests and the interests of union-busting politicians, stingy corporations, greedy universities, and predatory financial institutions are not the same, there is no hope of a return to business as usual in the housing industry.

Young Homeowners by Region

The 30-to-34 age group is important for the housing market. This is the age group in which the homeownership rate typically rises above the 50 percent threshold, making homeownership the norm. A look at the homeownership rate of households headed by 30-to-34-year-olds by region shows that rates have already fallen below this threshold in two regions. More declines could be in store if growing numbers of young adults find homeownership unaffordable (because of unemployment, students loans, and tougher mortgage requirements) or undesirable (fear of losing their job, fear of being tied down).

Percent of householders aged 30 to 34 who own their home by region in 2004 (the year the overall homeownership rate peaked nationally) and 2010...

	2010	2004
U.S. total	51.6	57.4
Northeast	49.7	51.9
Midwest	58.2	65.0
South	53.1	58.8
West	44.6	52.1

Source: Bureau of the Census, Housing Vacancies and Homeownership

This Is Where Your Customers Went

Any business wondering where the customers went can find out by taking a look at the Federal Reserve Board's new estimates of household debt. Millions of households, it turns out, are carrying the baggage of education loans, preventing them from buying homes, cars, furniture, going to restaurants, or taking vacations.

In 2009, a substantial 18 percent of households in the United States had education loans. This was up from 16 percent in 2007. By age, the percentage of households with student debt extends well into middle age. Take a look:

Under age 35:  37%
Aged 35 to 44: 20%
Aged 45 to 54: 18%
Aged 55 to 64: 10%

These loans are not trifling either. The size of student loans exceeds vehicle loans and far surpasses credit card debt. For households with student debt, the median amount owed was $15,000 in 2009, up from $12,400 in 2007 (in 2009 dollars)--a 21 percent increase in two years. For the record, the median amount households owed on vehicle loans was a smaller $12,400. The median amount owed on credit cards was just $3,300.

The households most burdened by student loans are the same ones many businesses were counting on to spend their way out of the Great Recession: married couples with children (24 percent have student loans, and they owe a median of $15,000), renters (24 percent have student loans, and they owe a median of $12,000), and college graduates (25 percent have student loans, and they owe a median of $20,000).

A funny thing happened on the way to where we are today. Your customers signed on a dotted line, and now their current and future income is being siphoned off by someone else.

Why the Stability in Household Spending?

Between 2006 (the year household spending peaked) and 2009 (the latest available data), average household spending fell 5 percent, after adjusting for inflation--from $51,504 to $49,067. This is a relatively modest decline considering the severity of the Great Recession. Why has household spending been so stable?

1. Some households are spending more. Householders aged 65 or older boosted their spending between 2006 and 2009--up 0.7 percent after adjusting for inflation, according to my analysis of Consumer Expenditure Survey data. Every other age group cut back, with householders under age 45 cutting back the most.

2. Most workers have jobs. The unemployment rate stood at 9.4 percent in December 2010, an unacceptably high level. Nevertheless, 90 percent of workers had a job in December. An NBER survey found that 19 percent of workers had experienced unemployment between November 2008 and October 2009, a painfully high number. Nevertheless, 81 percent of workers had a job during the darkest days of the Great Recession. This fact has stabilized household spending.

3. The unemployed are minding the gap. When household income declines, many families attempt to bridge the (hopefully temporary) gap by draining their savings or borrowing. The same NBER survey found that, among those who became unemployed, average household spending fell by a modest 3.5 percent. One-third of the unemployed had taken money out of savings, and 27 percent had received financial help from friends and family. A Pew Research poll confirms that many of the unemployed are receiving a helping hand. Forty-nine percent of Pew respondents reported loaning money to someone during the recession.

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Another Look at Who Is to Blame

In a recent online poll, Time magazine asked its readers who was most to blame for the current economic crisis. Readers rated the guilt of 25 different people on a scale of 1 (innocent) to 10 (guilty). On that scale, the American Consumer rated an 8--even guiltier, according to the public, than George W. Bush or Alan Greenspan. "We've been borrowing, borrowing, borrowing," explained Time, "living off and believing in the wealth effect, first in stocks, which ended badly, then in real estate, which has ended even worse."

But is the American Consumer guilty as charged? Just in time to shed some light on the matter, the Federal Reserve Board has released the long-awaited results of the triennial Survey of Consumer Finances. The latest survey, taken in 2007, reveals the economic status of the average American household at the peak of our supposed profligacy. The survey results turn out to be a friendly witness, presenting evidence not of our guilt, but of our innocence. Yes, the results show our 2007 net worth swollen by inflated housing prices and they reveal the rush of money into real estate. But as in previous years, the results disprove the notion that the average household is deeply in debt.

Let's hear the evidence.

Exhibit 1: For the average household, debt is modest. The median amount of outstanding debt for households with debt (77 percent of all households) stood at $67,300 in 2007. This figure includes mortgage debt.

Exhibit 2: Most debt is mortgage debt. Seventy-five percent of the debt owed by the average household is the mortgage on their primary residence. Even this debt is not overwhelming. The median ratio of mortgage debt to housing value stood at 53.3 percent in 2007. Only 1 percent of homeowners had mortgage debt greater than the value of their primary residence.

Exhibit 3: Home equity loans are not common. Only 18 percent of homeowners had a home equity line of credit, and an even smaller 12 percent had an outstanding balance on a home equity loan. This proportion has not changed since 2004.

Exhibit 4: Few gambled in the housing market. The percentage of households with debts for "other residential properties" (second homes, rental units, investment properties, etc.) climbed between 2004 and 2007, rising from 4.0 to 5.5 percent. According to the Federal Reserve Board, this was the largest increase in the prevalence of debt among all types of debt, evidence of the rush to real estate during the housing bubble. Yet 94.5 percent of households did not drink the Kool-Aid.

Exhibit 5: Credit card balances are modest. Only 46 percent of households carried a balance on a credit card in 2007--a figure that was unchanged from 2004. The median outstanding debt for those with a credit card balance was just $3,000. Among households with bank-type credit cards, 55 percent say they pay their balance in full each month. The average credit card bill last month? Just $250.

Exhibit 6: Only a handful are in trouble. Only 14.7 percent of debtors owed more than 40 percent of their income, up slightly from the 12.2 percent of 2004. Despite this increase, the percentage of debtor households that were 60 or more days late in making a payment fell from 8.9 to 7.1 percent between 2004 and 2007.

The evidence proves that the average American household was on solid financial footing as of 2007. Consumers did not cause the financial crisis. The widespread belief that overconsumption is responsible for the meltdown is rooted in several factors such as falling prices for clothes, electronics, and many other goods (allowing people to buy more with less) and the presence of the large baby-boom generation in the peak spending lifestage.

But the saga continues. Although the Survey of Consumer Finances was taken in 2007, the Federal Reserve Board's analysis examines the impact on households of the financial collapse through October 2008. Housing values took a hit. The home equity of homeowners with mortgages fell from $91,000 in 2007 to $71,600 as of October 2008. The median ratio of mortgage debt to housing equity among homeowners with mortgages climbed 5 percentage points to 58.5 percent. The median value of the stock held by households fell from $35,000 to $22,500 between 2007 and 2008. Net worth also fell. In 2007, median household net worth stood at $120,300. By October 2008, the figure was down to $99,000, according to Federal Reserve estimates.

The sky has not fallen--yet. Note that even after the decline, the net worth of the average household is still very much positive--higher, in fact, than it was in 1998 after adjusting for inflation. But if in its soul searching the American public fails to place the blame for the financial crisis squarely where it belongs--on the financial institutions and government regulators who did not do their job--then consumer confidence will continue to fall, the recession will deepen, more will lose their jobs, and household wealth will plummet. The sky will fall.

Don't Blame Main Street

Americans are standing with their mouths agape as the stock market lurches. They lie awake at night worrying about what the future holds for their jobs, their families, and their communities. Who is to blame for this unfolding financial crisis? The finger of blame is pointing in many directions, but one place that does not deserve the blame is Main Street.

Just in time to provide some perspective, the Census Bureau has released the latest American Housing Survey, with data collected only a few months ago in 2007. You can't get much more current than that. And what do the 2007 numbers tell us? They tell us that the average American has been betrayed by financial institutions that should have known better.

No doubt you have heard many a pundit exclaim--in print and on TV--that Americans did this to themselves. We bought houses we could not afford, we used our homes as ATM machines, and we have fallen so deeply in debt that millions of us face foreclosure. Our bad behavior has brought the nation's financial institutions to their knees.

Just because newspapers and television say so does not make it true. In fact, the average American has been careful with his money. But the institutions in which we entrusted our dollars gambled them away.

The 2007 American Housing Survey provides the evidence.

First, let's take a look at mortgages. In 2007, the 51 million American homeowners with mortgages remained well above water. They owed a modest median of $100,904 on their homes--just 54 percent of their home's value. This statistic has not changed much in years--it was 55 percent 10 years ago in 1997. Granted, home values have dropped since 2007 and are likely to fall even more. Still, for most homeowners a substantial cushion remains. Only 3 percent of homeowners owe more than their house is worth. The great majority of homeowners with mortgages have 30-year fixed-rate loans carrying a median interest rate of 6.4 percent. Things on Main Street appear to be in order.

Second, let's take a look at home equity loans. The way it is reported, you would think everyone has a home equity loan. But among the nation's 76 million homeowners, only 14 million had a home equity loan or line of credit in 2007. Do the math, and that translates into just 19 percent of homeowners. Or put it this way: 81 percent of homeowners do not have a home equity loan. Even those who have tapped into their equity have not been using their home as an ATM machine. The median amount owed on home equity loans is a reasonable $25,934. Again, nothing exciting to report on Main Street.

Third, let's take a look at foreclosures. Most of the foreclosure numbers in the press come from Realtytrac, an online business that sells foreclosed properties--and in the process of doing so, collects foreclosure data. Realtytrac provides foreclosure statistics to much of the media, including the Wall Street Journal. Not surprisingly, its data show a big increase in foreclosures. In 2007, says Realtytrac, "more than 1 percent of all U.S. households were in some stage of foreclosure." That sounds like trouble on Main Street. But read the fine print in the methodology, and you will discover that the definition of Realtytrac's "households" is the Census Bureau's count of "housing units." There is a big difference between the two concepts. When a household faces foreclosure, a family loses its home. A household is defined as an occupied housing unit--meaning that someone lives there. In contrast, many housing units facing foreclosure are vacant, owned by flippers and developers who gambled on rising prices and lost.

In 2007, 14 percent of the nation's housing units were vacant--a record high. Overbuilt, overpriced, and financed by cheap money, these housing units are the crux of the crisis--a crisis caused by lax lending standards. It was not Main Street, but Wall Street that drank the Kool-aid. Main Street, however, is paying the price.

Bet You Didn't Know

Percentage of homeowners who do not have
a home equity loan or second mortgage: 82.

Source: Census Bureau, 2007 American Community Survey

Most Homeowners Are Not in Trouble

"Tapped-Out Consumers" was the recent headline in a Business Week article about the unfolding housing crisis. The New York Times chimed in with the sweeping claim that "Everyone from first-time homebuyers to Wall Street chief executives made bets they did not fully understand, and then spent money as if those bets couldn't go bad."

Everyone made bets? Time out. Let's check those breathless reports from the front lines of the housing crisis.

In fact, the unfolding housing crisis is hurting only a tiny percentage of homeowners. To get a realistic perspective, you have to look beyond the numerator--the people in trouble. You must also consider the denominator--the total number of homeowners. The denominator is HUGE. Last year there were 75 million homeowners in the United States. Few of them are in trouble.

Here's why: nearly one-third of the nation's homeowners--24 million--own their home free and clear, according to the latest statistics from the American Community Survey. That means they have no mortgage, no home equity loans, and are in no danger of foreclosure. While the decline in housing values may make them uncomfortable, it will not affect their bottom line unless, for some reason, they have to sell their house before housing prices resume their historically slow upward climb.

Things are not all that bad for the 51 million homeowners with a mortgage either. Most have managed their asset wisely. Unfortunately, the same cannot be said of the nation's financial institutions, which is the reason our economy is on the brink of recession. Let's look at the facts.

1. Most homeowners with a mortgage have a traditional loan. Fully 81 percent of homeowners with a mortgage have a fixed-rate loan, and their median interest rate is just 6 percent according to the American Housing Survey.

2. Most homeowners have a substantial cushion of equity in their home, a cushion that will protect them from all but the most catastrophic price drops. Homeowners with a mortgage owe, on average, only 55 percent of their home's value--leaving room for a substantial price decline before they are in hot water.

3. Most homeowners have NOT used their home as an ATM machine. Only 13 percent of the nation's 75 million homeowners even have a home equity loan, according to the American Community Survey. This fact bears repeating because the media narrative has "everyone" spending down their housing equity on granite countertops and large-screen TVs. To repeat, more than 85 percent of the nation's homeowners do NOT have a home equity loan.

Of course, in a housing market as large as ours, even a small percentage in trouble means millions are drowning. The American Housing Survey reveals that only 3 percent of homeowners owe more than their house is worth, for example, but that 3 percent amounts to 2.5 million homeowners. Even so, these numbers are a far cry from "everyone." Everyone did not make foolish bets, but the unfolding crisis shows that everyone will be hurt by the few homeowners and the many financial institutions that did.

Who Will Get Hurt by Housing?

Yesterday the National Association of Realtors announced a decline in sales of previously owned homes for the month of July, and today the Census Bureau reports that new home sales also fell last month. Although the declines were expected by analysts, both exceeded predictions, heightening fears of trouble ahead for homeowners and the economy.

Who will be hurt by a downturn in the housing market? One vulnerable group is young adults. The homeownership rate of householders under age 25 has grown faster than that of any other age group over the past five years. In 2005, 26 percent of householders under age 25 owned their home, up from 22 percent in 2000. The homeownership rate of householders aged 25 to 29 ranked second in growth during those years, rising from 38 to 41 percent. Of the 3.3 million new homeowners in the U.S., more than one in five are under age 30.

In years past, these young adults would have been renting apartments and could have benefited from the transition to a buyer's market. But with housing prices rising fast and lenders marketing tempting interest-only loans, many took the plunge. Now they may have a hard time staying afloat.