My good friend, banker-scholar Alex Pollack of the R Street Institute, has shared with me some startling new data. High priced, comparatively luxury college student housing has been popular, and in this century lots of apartment complexes have been built with many amenities—granite or marble counter-tops, fancy swimming pools or saunas, etc. With unemployment rates below four percent and low overall real estate delinquency since recovering from the traumas of a decade or more ago, this sector should be booming. But according to a story published by Wolf Street (Wolf Richter), delinquencies are rising dramatically.

Mortgages for commercial apartment buildings are packaged together into commercial mortgage backed securities (CMBS). While government sponsored enterprises like Fannie Mae do much of this, there has been growing private sector involvement, trying to capture what has been regarded as a hot and growing market—nice housing for affluent students. Now, however, some 10.1 % of CMBS for student housing is either delinquent or in “special serving” (approaching delinquency). That compares with a low, normal 1.8% for other types of CMBS (e.g, non-student apartment housing). Moreover, deeper analysis shows the delinquency rate is even higher on student housing built recently.

College enrollments rose nicely from 1636 to 2010, with occasional short interruptions for wars, depressions, etc. Income levels were also rising, increasing the demand for higher education. The proportion of the college age population that was comparatively affluent, wanting to live in expensive private housing instead of commuting to school from home grew as well. All of that suggested “luxury campus housing is a growth industry.“ The biggest competition to private housing was the colleges themselves. Greedy universities were raising their own room charges very aggressively (far more than for ordinary rental housing), increasing student demand for non-college provided living spaces. But then came the Big Change, recognized only very recently. Total college enrollments began falling starting early in this decade, and the earlier growth in the residential four year university population diminished. Comparatively low interest rates resulting from loose Federal Reserve monetary policy lowered financing costs, encouraging new speculative housing ventures. Large increases in student indebtedness and the problems arising from it became increasingly publicized, perhaps giving more students and their parents reason to pause about spending large sums on living accommodations. Heightened talk about recent college graduates living in their parent’s basement while working as a Starbucks barista perhaps cooled the ardor for luxury housing. The growing largely correct perception that investing in college is somewhat risky may be leading people to either consider alternatives to college or to at least constrain college costs with cheaper housing. Excessive exuberance on the part of real estate investors is reaping its toll.

Looking beyond the collegiate scene, one could argue that there are some indications that the bad habits that led to the 2008 financial crisis are reasserting themselves. Is the luxury private college housing market a leading indicator of a new general housing bubble? Hopefully and probably not, but it is a chilling thought.

That raises a public policy issue. Why should the federal government be lending $1.5 trillion that it has to borrow itself, often to young persons from moderately affluent families, in some cases continuing the lending for six, eight or ten years (through graduate and professional school)? More broadly and provocatively, why should taxpayers be funding state universities, a significant proportion of whose students are from affluent families often living in luxury housing? Why subsidize affluent kids to live in luxury with their swimming pools and marble counter tops? The data from Raj Chetty and associates show that the top American universities are filled with students disproportionately from the top quarter of the income distribution, so funding these schools is therefore likely highly regressive—middle or lower income taxpayers are helping fund the education of relatively affluent kids.

The over-investment in college funded by a dysfunctional federal student financial assistance program clearly hurts many beside students attending school. There are investors losing money on seemingly safe CMBS securities. There are merchants and their employees in college towns suffering as enrollments at the non-elite schools fall. There are, of course, staff at the schools themselves. Educational over-exuberance has many casualties.