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Student loan forgiveness may lead renters to home ownership

Yahoo Finance's Dani Romero breaks down the implications of President Biden's student loan forgiveness plan on prospective home owners and the housing market.

Video Transcript

AKIKO FUJITA: Could renters on the sidelines soon be looking to buy? Yahoo Finance's Dani Romero here with the story. And Dani, you're specifically looking at the angle of those students who are shouldered with debt on their loans potentially having extra money now that the president has signed off on forgiveness.

DANI ROMERO: Yeah, so President Biden's student debt forgiveness plan may give renters, like we said, those on the sideline, that extra boost to buy a home. Lenders look at borrowers' debt, which can be weighted down by student loans, when considering them for a mortgage. But given the broader student debt population, canceling debt does increase their ability to take-- qualify for a mortgage, also save more towards a payment as well.

Tom Kozak, a former official from the US Housing Department, you know, he gave a great example of how this really could impact a potential first home buyer. He says that the elimination of a $200 monthly payment towards student debt could increase the purchasing power by $29,000. So that-- I mean, he was looking specifically toward the Portland, Oregon area, but that still kind of gives you a full picture of how much this really could help a potential first home buyer.

But not only that, analysts at Raymond and James, they also say that canceling debt will also increase the pool for potential for-- the pool for potential first home buyers, with the demand of increasing 1.5 million for sale housing units. So that would be-- supply would also be an issue as well.

BRIAN CHEUNG: Super interesting because if the pool of interested homebuyers increases, that's one thing, but the line for qualification is also moving as well. So I mean, how many of those first-time homebuyers would actually qualify if they did decide, hey, got a little extra money. Maybe I could try to buy a house.

DANI ROMERO: I mean, that is a really good point. So given the interest rate hikes that we have seen and also the volatility with mortgage rates, you know, that-- it is appropriate to expect that some of these potential first home buyers may not even qualify for home ownership for quite some time. But with that given said, if there is the possibility of an increase in demand for housing, that also could put downward pressure for residential rental prices as well, as more of them opt towards home ownership. So that would be a positive.

BRIAN CHEUNG: Yeah, well, a tough situation, broadly, but maybe this helps on the margin. Yahoo Finance's Dani Romero, thanks so much. Appreciate it.