The housing bubble is now acknowledged as a built-up bubble, leading to a potential explosive boom.

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The Student-Debt Bubble Fueled a Housing Bubble – WSJ

Home prices in the San Francisco Bay Area have plunged amid rising mortgage interest rates. The total value of the city’s homes has fallen by roughly $60 billion since last summer, causing about 1 in 8 recent sellers to take a loss, real-estate website Redfin reported last week.

San Francisco’s deflating home market doesn’t necessarily reflect the whole nation, but it isn’t surprising. Easy money and excessively supportive government policy during the pandemic fueled a surge in housing prices nationwide. The withdrawal of cheap credit will doubtless cause pain, though where and how is hard to predict.

Credit scores of home buyers have generally improved since the 2000 bubble years thanks in part to changes in FICO’s calculations that reduced penalties for unpaid medical debt. A decade of historically low interest rates also made it easier for buyers to finance debt.

Yet perhaps the biggest credit boost came from Obama-era income-based student-loan repayment plans, which capped monthly payments at 10% of discretionary income. Many student borrowers consequently aren’t paying down their debt, but it isn’t counted against them when they attempt to buy homes. While credit scores are improving, it isn’t clear borrowers have become more credit-worthy.

Add to the mix government-sponsored enterprises Fannie Mae and Freddie Mac, which have fueled the housing boom by making it easier for borrowers who can’t afford to repay their student loans to take out bigger mortgages.

Here’s out it works: Mortgage lenders have typically preferred that buyers have a total debt-to-income ratio less than 36%—meaning that monthly debt payments shouldn’t exceed 36% of one’s income. As housing prices climbed, however, Fannie and Freddie allowed home buyers with higher debt-to-income ratios to qualify for government guarantees.

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