Alan Greenspan, head of the Federal Reserve, surprised the market last Monday when he took a calming stance in his address to a banking conference. While many expected a gloomier outlook, Greenspan delivered a more positive view.
“History cautions that extended periods of low concern about credit risk have invariably been followed by reversal,” he warned. “The vast majority of homeowners have a sizable equity cushion with which to absorb a potential decline in house prices.”
This year, the median home price rocketed to $220,000, according to the National Association of Realtors, a 15.8% jump over the last year and the biggest jump since 1979.
The market and consumers feared Greenspan would join the consensus of other federal officials who have stated that despite high oil prices, interest rates must be raised to quell the heated growth of the house market and curtail any signs of further inflation. If Greenspan indicated impending rate hikes, the financial markets would have buckled to lower the already low consumer confidence index. Even college students would have felt the pinch, as the interest rates of student credit cards and private student loans may have risen.
College students will be affected by the housing market’s activity; the continued unchecked growth of the market and the inevitable “cooling looming” in the future could put those students and their families in a precarious situation. Families with incomes too large to receive financial aid, but not substantial enough to cover college costs, have turned the equity in their homes into loans or lines of credit to pay for higher education.
The Consumer Bankers Association reports an estimated 5% of funds drawn from home equity lines of credit have been used for education expenses.
The current value of real estate has made homes a viable option for college students. According to the National Association of Realtors, nearly 170,000 parents bought second homes for their college students.
Wayne Hunt, a sixth year business student from Orlando, used his savings from his summer internship to make the down payment on a two-bedroom townhouse. “It makes more sense for me to be investing in something than sending out a rent check every month,” he said. “This way I own an asset that will appreciate in value and make me money.”
The appreciation in the value of a house is dependant upon the continued growth of the housing market. If the housing market cools, while housing prices drop, many gains in equity due to past growth will vanish as easily as they appeared; the market correction could spell trouble for student homeowners and equity borrowers.
“When my four year scholarship ended, my parents considered taking money out on the house to pay for the rest of my school,” said Darnell Suggs, a fifth year computer engineering major from Atlanta, Georgia.
Parents who have pulled equity from their homes could end up locked into their loans if the resale value sinks below the amount still owed to the lender. For many families, home equity is the only financial shield against hardships caused by credit card debt, rising interest rates, sudden unemployment or disability.
Student homeowners would suffer losses as well under the correction. If the market for homes cools, students could find they owe more on the debt used to finance the house than what the house is actually worth. While the resale value of the property may decline, the local market for rentals may remain largely unaffected, a silver lining to those student homeowners that plan to rent their homes as sources of income upon graduation.
Contact Lefran Lloyd at firstname.lastname@example.org