Millennials, Boomers Provide Tailwinds for U.S. House Builders

 In Market and Investment Insights

Millennials are finally seeing the light and are emerging from their parents’ basements, or perhaps are realizing that building equity by buying property is a better option than renting.

Born between 1982 and 2000, millennials number 83.1 million, more than a quarter of the U.S. population and more than the 75.4 million boomers, those born between 1946 and 1964, according to the U.S. Census Bureau. The average age of a first-time homebuyer is 33, according to real-estate marketplace Zillow, and the oldest millennials are now reaching this point in life, while the largest segment of the cohort is in the 20-25 bracket, suggesting years of demand ahead.

Chronic undersupply means millennials entering the market haven’t only bought new homes from the likes of D.R. Horton Inc., whose three-year-old entry-level Express brand now accounts for about one-third of the largest homebuilder’s closings at an average selling price of about $230,000.

They also purchased existing properties from folks who were waiting for prices to recover following the Global Financial Crisis. Data suggests this recovery in equity value may benefit builders who focus on starter homes, the second tier and properties for downsizing boomers.

Sustained demand in the bottom tier may also benefit mortgage insurance providers as millennials take advantage of an increasing range of loan products aimed at those unable to muster a 20 percent down payment or to those borrowers with lower credit scores.

Supportive demographics suggest homebuilders can withstand potential headwinds such as rising interest rates. A dearth of labor and rising input costs are likely to be the biggest short-term headwinds, as workers and materials are diverted to Puerto Rico, Florida, Texas and Louisiana to deal with the aftermath of Hurricanes Harvey, Irma and Maria. However, valuations based on low forward multiples, inventory constraints and pent-up demand from millennials and boomers should favor builders geared to meeting such demand.

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Used with permission. First published on Barron’s 10.6.17

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