The student debt bubble is going to have long lasting ramifications on the housing market and some fail to make the connection. It now seems that there are countless articles even in the mainstream press discussing the wallet crushing debt that college students are taking in pursuit of higher education. Yet there is little synergy or attempt to connect housing to this (the largest expense of most Americans). It can be taken as a given that college graduates at some point will be potential future home buyers. Yet in the interesting economy that we now live in you have the cost of housing getting cheaper and the cost of college soaring past inflation. This of course isn’t being spurred by wealthier families but the fact that student loan debt is now quickly approaching the $1 trillion mark. Here in California the two public university systems, the California State University (CSU) and University of California (UC) have raised tuitions since the budget crisis hit some five years ago. It would help to measure the cost of an education versus housing since both our heavily leveraged ventures.
The cost of going to college in housing terms
I went ahead and updated the latest California housing figures and also pulled tuition data for the UC going back to 1975. It is helpful to divide the cost of a home by the annual tuition at a UC to get a ratio of this expense:
This is an interesting perspective. The cost of an UC degree was cheapest in 1980 in relation to housing prices. For example, for the cost of the median home in California in 1980 you would have been able to purchase over 330 years of education at the UC. Today the cost of a median priced California home will only get you 22 years of college education.
Better yet, think of it in four year terms since this is the typical time frame for most college degrees. In 1980 the median household income was roughly $21,000 while total tuition for four years at a UC would cost you $1,200. In other words, the typical household with one year of income could pay for 17 degrees at the UC system.
Today the median household income is $60,000 yet four years at a UC will cost you roughly $48,000. In other words, the typical California family can now only afford one full degree when 30 years ago it would purchase 17. No matter how you slice it the cost of a college education has far outpaced the cost of housing and even household income.
It might be useful to chart this out on a chart:
You’ll notice that housing and education largely tracked each other until 1995. At this point, housing surged higher while education declined for a period of five years. This suddenly changed in 2000. At this point the cost of tuition at a UC aligned with housing prices in the state and quickly made up for lost ground. From 2005 to 2010 tuition doubled. At the same time the cost of the median California home fell almost by half and is still treading lower. The cost of a UC education continues to move higher and higher.
Private schools the option?
Now even with this quick rise, the annual tuition for a UC degree is $12,000. You can compare this with the $40,000 to $50,000 charged by private institutions. This incredibly fast increase is causing many students to pause and wonder how much debt is too much debt? The issue at hand is that a college education still carries a blanket statement notion that all degrees are created equal. This mentality was highlighted during the housing bubble where even run down homes were selling for incredible prices just because people had the deeply held idea that home values only went up. This vision permeated every aspect of the housing market. The same is now going on with higher education where the cost of every degree is going up equally even though the return on investment is extremely different for various career paths.
Not everyone will go to college and pursue a four year degree. In fact, most won’t. The official statistics have roughly 30 percent of Americans with a four year degree:
Source: Pope Center
This is good only in the sense that students are getting a solid college education. Recent data also has 10 percent of college students enrolled in for-profit institutions many that are largely one step above a paper mill. I can understand that people will point to college attainment as a sort of panacea for economic woes but just look at our current economic dilemma. It isn’t that college is bad; to the contrary an education is very important. I agree with Socrates that the true evil in the world is ignorance. Yet what use is it going into massive debt for a piece of paper from a fly by night subprime college operator?
What I do believe is our major change is that many of our new jobs are dominated by the lower paying service sector fields. Jobs in engineering, the sciences, and information technology pay better but we need to produce more to meet market demand. A big change over the last generation is also the typical blue collar worker is going to struggle to buy any sort of home especially in high priced states like California. This is largely due to the major contraction occurring in manufacturing:
While these typically better paying jobs were leaving the nation we have kept on adding more and more service sector positions:
So while these major debt bubbles pop, people are starting to realize that more systematic assessments regarding housing and education need to be made. Just because the standard sticker price is $40,000 to $50,000 a year for a private university does not mean it is worth it. The same applies for housing. Just because someone is willing to lend you $500,000 for a depression built stucco box does not mean it is a solid investment. I’m surprised it took this long to realize but Occam’s razor may be applicable here; there usually is no free lunch and with debt, at some point it will need to be paid back.
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