Lower housing prices may cut college enrollment, especially for the poor

Lovenheim

Plummeting housing prices could lead to a decline in college enrollment as families cut back on expenses, finds a new Cornell study by economist Michael Lovenheim. Hardest hit may be poorer families, he added.

"The collapse of the housing bubble and the increasing difficulty of tapping one’s home equity is likely have a negative effect on college enrollment due to the reduction of family housing wealth," Lovenheim said.

In turn, lower college enrollment may have negative long-term effects on the supply of skilled labor in the United States, he added.

His study is published in the October issue of Journal of Labor Economics.

Lovenheim, assistant professor of policy analysis and management in the College of Human Ecology, argues that households used home equity to finance college during the housing boom in the 2000s, when housing wealth was most liquid. Now that housing prices are 35 percent lower than their 2006 peak nationally, young people from lower- and middle- class families may not be able to afford a college education, he said.

During the housing boom, each $10,000 that a family had in home equity increased by more than 1 percent the likelihood that their children went to college. Because home equity increased by $58,000 between 2001 and 2005, this small increase led to sizable changes in college enrollment. The effect was most pronounced for those with the fewest resources: A $10,000 gain in home equity leads to an almost 14 percent increase in college attendance among families that earn less than $70,000 per year, Lovenheim said.

"These estimates imply that the recent housing bust could significantly shrink college enrollment through a reduction in the housing wealth of families with college-age children," he said.

Lovenheim focused on home equity for several reasons -- most important because 85 percent of college attendees come from families that own a home. "For all but the wealthiest families, housing wealth comprises the majority of household wealth, and for many families their home is their only financial asset," he said.

In addition, the recent housing boom that began toward the end of the 1990s was characterized by both large increases in home values and an increasing liquidity of accumulated home equity. Between 1990 and 2005, real median home prices in the United States increased by 55 percent and extracted home equity as a percent of personal income rose by a whopping 600 percent.

After 2000, a family that experienced a large increase in the value of its home would have a significantly easier time financing college expenditures due to the increased ease of borrowing against its home’s value, he said.

"Considering how problems in the housing market have slashed family resources, it is likely that many families will face increasing limits in their ability to finance college in the near future," Lovenheim said.