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.
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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%.
Barry Ritholtz, chairman of Ritholtz Wealth Management, in a Bloomberg View column 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.
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.
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%, 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, 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.
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.