Photo: Robert Clark

Over a third of American renters who plan to buy a home in the next year are carrying student loan debt, which they say is their biggest obstacle to homeownership, according to a new report by the listing site Zillow.

“Higher education pays off when it comes to lifetime earnings and the long-term odds of homeownership, but carrying any kind of debt limits how much home buyers can afford,” says Aaron Terrazas, Zillow chief economist, in a statement.

US student debt reached record levels this year, hitting $1.56 trillion at the end of the third quarter of 2018. Paying off student loans also makes it harder to set aside money for a down payment, which is one of the top barriers to homeownership.

And, as a result, saving for that down payment can take significantly longer for Millennials and Gen Z than it did for previous generations. It can take seven years — or longer — for some Americans to save for a downpayment in today’s labor and housing market, plagued by rising rents and home prices and stagnant wage growth.

1. Eroding affordability

On average, renters who are planning to buy in the next year are currently paying around $388 per month for their student loans — this on top of their monthly rent, which tops out at around $1,440 per month (nationally).

Making a budget — and sticking to it — can help would-be buyers get control of their finances and plan for the future. And, with apps like Mint and PocketGuard, tech-savvy renters can manage their savings and watch their spending with just a tap or a swipe.

Setting priorities for spending can help cut excessive spending, and money saving alternatives to routine spending — like bringing coffee or lunch from home five days a week — can add up quickly.

Paying bills on time — especially student loans — will help beef up your credit score, which can help you get a lower rate on a mortgage.

“Even if you don’t have plans to buy a home in the next year or two, it’s not a bad idea to start setting aside savings for a future home purchase,” Sklar Olsen, Zillow director of economic research and outreach, recently told Livabl.

2. Know all the options

The highest priced home a renter with student debt could afford without spending more than 30 percent of their income on housing and student debt is $269,400. In other words, they can afford to buy just over half of the homes currently for sale (nationally, based on the current median home value of $220,100).

But the number of affordable entry-level homes is at crisis levels and new construction has not kept up with demand in the years following the bust. First-time buyers should be prepared to look for as long as a year (or more) and be outbid in more competitive markets.

Many prospective buyers are not aware that they don’t actually have to put the traditional 20 percent down, which cuts down the time needed to save dramatically.

“It’s also important to remember that there are many options for mortgages requiring less than 20 percent down,” says Olsen. There are many programs available to first-time buyers to put as little as 3 percent down.

Another thing many prospective homebuyers under-estimate is the actual cost of homeownership that extends beyond the purchase — from moving costs to monthly home maintenance bills, the expenses can quickly add up to thousands that some first-time buyers may find they hadn’t properly budgeted for.

3. Location, location, location

Student loan debt plays the biggest role in affordability in the Las Vegas, Nevada metro area, where buyers with no student debt can afford a much larger share of the homes for sale than those with student debt (57 percent versus 29.3 percent, respectively). Las Vegas is one of the larger metro areas still struggling to regain home values since the housing bust.

It makes the smallest difference in San Jose, California, where buyers with student debt can afford less than 12 percent of homes, compared with the 18 percent of homes that would-be buyers free from student debt can afford to buy.

Despite the lure of high paying tech jobs, housing costs in San Jose are among the highest in the country — and even earning a “good” living may not be enough to afford a home in San Jose.

Many small and mid-sized metros, like Pittsburgh, Pennsylvania, offer many of the same local amenities as larger, big-name cities but at a substantially discounted price. And while living in Pittsburgh may not be as “cool” as living in the Big Apple, you’re sure to get a lot more bang for your buck in Pittsburgh.

And in some markets, the suburbs are often pricier than urban areas.

“In certain markets, buyers can find some relief from high prices and tight inventory. They just need to know where to look,” Justin LaJoie, general manager, recently wrote.

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