In discussing Warren Buffett’s claim that housing will come back simply due to structural factors (he calls it “hormones”), Matt Stoller makes the point that the significant drop in household formation is a new phenomenon. Only three years since 1947 have shown a negative household formation, and they include three of the past four years – 2008, 2010, and 2011. Matt has a hypothesis for this:

And what is behind this lack of household formation? There are possibly many reasons, but one sure driver is student debt. The average college graduate now carries $25k in student debt after graduation. It’s no surprise that young people aren’t buying homes, but are increasingly renting and doubling up with others.

“According to a recent Federal Reserve study, only 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier.”

Let’s go over to the link Matt provides and look at the connection between student debt and home sales. It turns out that even six-figure income earners cannot qualify for a mortgage because of liabilities with student debt. And unless a family has significant means, the students cannot come out of college debt-free anymore, given the economics of higher education.

Recent college graduates carry an average debt load of more than $25,000, limiting their ability to qualify for mortgages even if they’re able to land a job in a market with an unemployment rate of 9 percent for 25- to 34-year-olds. Dubbing it a “student loan debt bomb,” the National Association of Consumer Bankruptcy Attorneys (NACBA) warned on Feb. 7 about the effects of rising student debt on recent graduates, parents who co-signed their loans, and older Americans who’ve gone back to school for job training.

“Just as the housing bubble created a mortgage debt overhang that absorbs the income of consumers and renders them unable to engage in consumer spending that sustains the economy, so too are student loans beginning to have the same effect, which will be a drag on the economy for the foreseeable future,” John Rao, vice president of the NACBA, said on a conference call.

This is separate and apart from the numerous problems with the housing market, and it points to a much more structural issue. Rising college costs simply force graduates into a period of debt servitude, where they cannot move forward with what their predecessors took on at their age. Hormones has nothing to do with it.

So one answer is to significantly reduce the debt load for recent graduates. The President proposed in the State of the Union address to link higher education funding from the federal government to slowing the growth of their costs of admission. But given the enormity of the problem, slowing the growth may not be enough. Student debt sits at a whopping $867 billion in the United States, and all of the encouragement toward a college education has to wrestle with that number, and how it distorts the economy.

Incidentally, federal student loan rates could double in the next year if Congress takes no action. This is a massive problem that doesn’t get nearly enough attention.