By William Watts, MarketWatch
Millennials are no longer snubbing homeownership, and some
market observers argue that could offer a tailwind for
housing-related shares and the broader stock market.
A September study by Zillow Group is getting a lot of attention.
It found that people aged 18 to 34 now make up 42% of home buyers
in the U.S., making them the largest group. The phenomenon is being
cited as proof that millennials don't hate the idea of
homeownership after all, and that a long decline in homeownership
that started in the middle of the last decade had more to do with
the financial crisis and its aftermath.
Analysts at Pavilion, in a recent note, argued that the
underlying trends offer further encouragement. In a note, they
contend rising rents and the prospect of higher interest rates may
have convinced many young Americans that now is the time to buy. At
the same time, rental vacancies are rising. That's potentially bad
news for residential real-estate investment trusts, they said.
Meanwhile, a recovery in income growth for persons aged 25-34--a
cohort that had lagged behind other age groups--is also
encouraging, they said. All in all, that should be good news for
U.S. home builders, they said, though they noted that tight labor
conditions are pushing up construction industry wages and have left
home builder profit margins flat in recent years.
Home builders have outperformed the broader stock market so far
in 2017. The SPDR S&P Homebuilders ETF (XHB) is up nearly 23%
year-to-date, versus a 15.2% rise for the S&P 500 .The iShares
U.S. Home Construction ETF (ITB) is up nearly 49%.
Read:This sector has quietly hit new highs and could be the next
stock-market leader
(http://www.marketwatch.com/story/this-sector-has-quietly-hit-new-highs-and-could-be-the-next-stock-market-leader-2017-09-28)
Barry Ritholtz, chairman of Ritholtz Wealth Management, in a
Bloomberg View column
(https://www.bloomberg.com/view/articles/2017-11-10/millennials-leave-the-basement-to-buy-homes)
also cited rising rents and a strengthening economy, as well as a
delayed pickup in household formation, as factors behind the
renewed millennial interest in homeownership.
The reversal of the phenomenon, he said, is an important
contributor to the momentum behind the economic recovery from the
credit crisis and is also a "potentially significant for the next
leg up in U.S. equity markets." He cautioned, however, that
proposals in tax legislation to reduce the mortgage deduction could
dent the recovery.
Read:Republican tax plans will make it less beneficial to own a
home, analysis finds
(http://www.marketwatch.com/story/republican-tax-plans-will-make-it-less-beneficial-to-own-a-home-analysis-finds-2017-11-13)
Kristina Hooper, global market strategist at Invesco, isn't
convinced millennials are the key to the housing recovery.
While millennial attitudes toward homeownership do appear to be
changing in a positive way, "the reality is that they are saddled
with so much student loan debt," she said, in a phone interview.
She cited a September report from the National Association of
Realtors and American Student Assistance
(https://www.nar.realtor/research-and-statistics/research-reports/student-loan-debt-and-housing-report)
showing a U.S. student debt load of $1.4 trillion, accounting for
10% of all outstanding debt and 35% of all non-housing debt.
See:Why millennials can't buy homes
(http://www.marketwatch.com/story/student-debt-is-delaying-millennial-homeownership-by-seven-years-2017-09-18)
Moreover, the survey of persons born between 1980 and 1998 found
that among non-homeowners, 83% cited student loan debt as the
factor delaying them from buying a home.
Add in the potential elimination of the mortgage deduction and
the deduction for state and local taxes, it's difficult to get too
excited about a millennial resurgence driving the housing market,
she said.
Hooper argued that a focus on home improvement rather than home
buying could be good news for home furnishing and
renovation-related stocks. Even in a worst-case scenario in which
the mortgage interest deduction is eliminated, current mortgage
holders would be grandfathered in, giving them incentive to focus
on renovation rather than seeking new homes, she said.
For that matter, the Pavilion strategists see home furnishings
as the better way to play an improving real estate trend, arguing
that a larger share of first-time buyers in overall sales suggests
better sales growth. Meanwhile, the sector's price-to-earnings
ratios are recovering and, while not cheap, are far off the
postcrisis highs, they said.
Data on Friday showed U.S. October housing starts jumped 13.7%
(http://www.marketwatch.com/story/housing-starts-booms-137-in-october-2017-11-17),
attributed in part to a recovery from hurricanes that ravaged Texas
and Florida. Meanwhile, sentiment among home builders has been
running strong all year.
The week ahead sees earnings from retail home improvement chain
Lowe's Companies Inc. (LOW) on Tuesday, as well as results from
farm-equipment maker Deere & Co. (DE)(DE) on Wednesday.
It will be a holiday-shortened week for U.S. markets, with
exchanges closed for Thanksgiving Day on Thursday and abbreviated
hours in store on Friday. Stocks ended the past week on a down note
(http://www.marketwatch.com/story/weekly-win-for-us-stocks-in-jeopardy-as-russia-probe-moves-closer-to-trump-2017-11-17),
leaving the S&P 500 and the Dow Jones Industrial Average with
weekly declines of 0.1% and 0.3%, respectively, but still not far
off all-time highs. The Nasdaq Composite closed at a record
Thursday and ended the week with a 0.5% rise.
The economic calendar will see existing home sales data for
October released on Tuesday at 10 a.m. Eastern. Economists surveyed
by MarketWatch look for annualized rate of sales to come in
unchanged from September at 5.39 million.
See:MarketWatch Economic Calendar
(http://www.marketwatch.com/economy-politics/calendars/economic)
Wednesday will see weekly jobless claims as well as October
durable goods orders, which are forecast to see a 0.5% rise,
November consumer sentiment figures, and the release of the minutes
of the Fed's November policy meeting.
(END) Dow Jones Newswires
November 20, 2017 08:15 ET (13:15 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.