A friend of mine is suffering from excruciating
anticipatory pain. He’s heading to New York to attend his
daughter’s graduation, which should be a glorious moment in life.
But her commencement speaker is Fed Chair Janet Yellen. “Gotta find
some thorazine to take before the ceremony,” he muttered. He paid
for his daughter’s education. Not many students are that lucky.
Student
loan balances soared 362% to $1.1 trillion since 2003, during a
period when mortgage debt – including the effects of the current
Housing Bubble 2 – rose “only” 65% to $8.2 trillion and credit
card debt actually declined by
4.2% to $660 billion (chart).
The burden of servicing that increasing pile of student loans is
eating into other forms of borrowing and spending, such as the
American classic, reckless consumption on credit cards, or the
purchase of a home. And so the proportion of first-time buyers –
the single most important sign of a healthy housing market – has
been shrinking for years.
Recent
graduates are facing a job situation that remains tough. The
employment-population ratio for 25-34 year olds (chart)
is on a similarly terrible trajectory as the EP ratio for the overall
working-age population: It declined sharply from the employment peak
in 2001 when 81.5% of the people in that age group were working. The
ratio dipped below 78% in 2003, recovered a little, only to plunge in
2008, finally dropping below 74% in 2010. Since 2012, it has been
recovering in fits and starts to a recent high of 76% earlier this
year, only to drop again more recently. Like other Americans, this
age group is having trouble finding jobs.
Over
70% of the students who are sitting through a commencement speech
this spring have student loans. They will start their career, if any,
with an average
student loan balance of
$33,000. Even when adjusted for inflation, it’s about twice as much
as 20 years ago. Back then, only 43% of students graduated with
student loans. After decades of red-hot tuition and fee increases,
working your way through college in four years, the way I and many
others did back in the day, has become a pipedream.
Every year, it gets worse. The Class of 2012
was the most indebted ever. Then the Class of 2013 took over that
dubious honor, only to be trumped by the Class of 2014. Next year,
the honor will go to the Class of 2015. Among the reasons for this
fiasco: the way colleges are paid liberates them from both
free-market and governmental constraints. They can charge whatever
they want and get away with it because students can just go ahead and
borrow it. Even noisy student protests with mass arrests trip up
administrators only briefly. And through the student loan programs,
designed with whatever intentions, the government is simply aiding
and abetting colleges in extracting ever more money from the future
lives of their students.
The
equation might not have gone so horribly awry if each class of
graduates had seen their incomes skyrocket in line with their student
debt. But that’s a crummy joke. Between 2005 and 2012 – the last
year for which this data set is available – the inflation-adjusted
average student loan balance of graduates under 30 years old has
soared 35% while the median annual income adjusted for inflation for
college graduates between 25 and 34 years old has declined by
2.2%. And this is what this torturous condition looks like:
Something has to give. Sure, whittling down
real incomes via inflation – among the goals of the inflation
mongers at the Fed, the IMF, and elsewhere – reduces the labor
costs of employers and makes the US more competitive with Bangladesh.
Not raising the minimum wage in line with inflation is based on the
same principle. And surely, providing workers only minimum food, some
rags to wear, and basic shelter, instead of paying them actual wages,
would do an even better job at it.
But this strategy has a drawback. These
graduates will soon enter the generation of potential first-time home
buyers. Today’s first-time buyers graduated a few years ago. For
them, dealing with their student-loan burden isn’t nearly as much
of a drag on their spending power. And they’re already staying away
from the housing market.
The Class of 2014, including some of those who
dozed through Yellen’s commencement speech, will be suffocating
under their record-setting student loans that they have to pay for
with their skimpy wages – the lucky one who find jobs that pay
enough to make any payments at all. This is the future generation of
first-time home buyers. And on top of their mountain of student
loans, they’re facing higher interest rates and the inflated prices
of Housing Bubble 2, if it can be kept inflated long enough, which
appears unlikely, given the deteriorating condition of the crux of
the housing market, these suffocating first-time buyers.
Home
prices in San Francisco hit $945,000 in February, 16%
above the
prior peak. But momentum stocks, which the city is addicted to, are
crashing. With terrible results. Read….Momentum
Stock Fiasco Pricks San Francisco Housing Bubble
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