Posted by Jim DeBellis on July 20th, 2011

Demographics are putting a long-term curse on the future of the housing market just as much as the economy, tight credit, and the foreclosure situation.

Those looking at retirement in the next decade are having to spend a greater percentage of their income on necessities due to lower income or job loss, while at the same time they have to squirrel away more of their income for retirement in light of hefty 401(k) losses and uncertainty about the future of Social Security. This means that there won’t be as many purchases of retirement homes.

Veteran homeowners are hunkering down in their current homes, often doing all they can just to hang on to them, so there is not much “trading up” going on either. Their incomes have leveled off or decreased as well, while at the same time they are paying a fortune for gas, food, and their kids’ skyrocketing college tuition.

Which brings us to the most severe element of the problem: New college graduates are earning less, saddled with more debt from college loans, and not positioned to become the next generation of first-time homebuyers. It is only first-time buyers, after all, that can expand the housing market and reduce the inventory of homes on the market. Current homeowners just “house hop” and leave one house vacant when they buy a new one.

Some of the statistics are alarming. According to PIMCO, the average debt from a four-year college degree is over $23,000 and rising. At the same time, the average starting salary for a new college grad dropped from $30,000 in 2007 to just $27,000 in 2010.

The debt does a several bad things for housing and the prospects for homeownership. It makes the debtor less worthy of credit or possibly makes the person unable to qualify for a mortgage. If they can qualify, it will be for a much smaller mortgage. The lower income together with the debt also make it difficult or impossible to save for a down payment . The money that they could be saving for a down payment will instead be going to service the student loan – not to mention that the rising cost of rent will make it even more difficult to save. Now throw in the fact that Dodd-Frank regulations may require a 20 percent down payment to get a mortgage at all, and yesterday’s first-time buyers will become tomorrow’s long-term renters.

Without a major change in the American economy, today’s generation of college graduates may be buying their first home at the age of 40 or 50.