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Monday, September 13, 2010 10:55 PM

How Student Debt Wrecks Marriages, Inhibits Family Formation, and Delays the Housing Recovery

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The New York Times had an interesting article last week on how student debt is affecting family formations. Please consider How Debt Can Destroy a Budding Relationship

Nobody likes unpleasant surprises, but when Allison Brooke Eastman’s fiancé found out four months ago just how high her student loan debt was, he had a particularly strong reaction: he broke off the engagement within three days.

Ms. Eastman said she had told him early on in their relationship that she had over $100,000 of debt. But as the couple got closer to their wedding day, she took out all the paperwork and it became clear that her total debt was actually about $170,000. “He accused me of lying,” said Ms. Eastman, 31, a San Francisco X-ray technician and part-time photographer who had run up much of the balance studying for a bachelor’s degree in photography. “But if I was lying, I was lying to myself, not to him. I didn’t really want to know the full amount.”

Ms. Tidwell, 26, is involved in a serious relationship with Stefan Kogler, an architect who is a native of Austria and living in Vienna. To Europeans, who often pay little or nothing toward their university studies, the idea of going deeply into debt to get educated is, well, foreign.

Ms. Tidwell feels no guilt about the $250,000 in debt she will probably run up, including some from a master’s degree program she completed in London, where she and Mr. Kogler met. “I didn’t acquire it because I go out and shop a lot,” she said. “It’s because I’m doing something that I’ll love for the rest of my life.”

Still, if she and Mr. Kogler are going to move in together and get engaged, she wants their financial arrangements to be clear and fair. But how do you define fair when you’re bringing a quarter of a million dollars in debt to a relationship?

All of this raises the question: At what point do you have a moral obligation to disclose your indebtedness during courtship? On the eighth date? When you get to third base? In your eHarmony online dating profile?

Ms. Eastman in San Francisco says she knows that now. “What would I have done differently, besides bringing a copy of my credit report on the first date?” she said, with a rueful chuckle. “I would have been more responsible.”
Family Formation a Serious Macro Issue

Such stories may make for pretty humorous reading, but this is a serious macro issue. Housing typically leads the economy out of recession. If couples put off marriage, or never get engaged in the first place, that obviously hinders family formation.

In turn, that hinders the demand for houses and related goods and services, not to mention the goods and services required to have kids.

Moreover, student debt contributes to the problem of unloading a massive inventory of homes and a massive shadow inventory of homes on top of that. Many students are so deep in debt and without a job that not only have they delayed marriage, they have moved back home and are not even renting apartments.

Banks sitting on foreclosures thinking that a housing recovery is around the corner, have another thing coming. These structural problems, including boomers headed into retirement wanting to downsize their homes (with no one to sell to), puts additional pressure on home prices.

Ironically, falling prices is the cure for this mess, not the problem that politicians see and attempt to fight. Home prices need to drop to affordable levels where there is genuine demand to clear housing inventory.

Because of all these factors, I expect housing prices to remain weak for a decade, even after prices bottom.

That bottom in housing prices may still be a couple years away (or longer), and the more the Fed and Congress tries to prop up prices, the longer away the bottom is likely to be. Although some localities my be in the process of bottoming now, there is simply no economic reason to rush into buying a house today. Other reasons may prevail.

Mike "Mish" Shedlock
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