A Millennial Housing Boom?
08/04/2015 9:00 am EST
Demographic conditions are ripe for a boom in US residential construction; the next decade will see the Millennials—the largest generation in US history—form households and buy their first homes, explains Daniel Rohr, James Krapfel, and James Sinegal, analysts with Morningstar StockInvestor.
So far, a toxic combination of consumer debt, underemployment, weak wage growth, and strict underwriting has obstructed this demographic potential and forestalled a full housing recovery.
We believe this has created an enormous pent-up demand for housing, which will be unleashed by tighter labor markets and looser mortgage eligibility standards.
The millennials are entering their 30s, when increases in household formation and homeownership rates are greatest. Meanwhile, the baby boomers are far more likely to age in place than their predecessors.
The lack of demographic support for the previous housing boom set the stage for an especially painful bust. We estimate that anywhere from three million to six million total households weren't formed from 2005-2014 because of economic conditions.
Employment growth and improvements in mortgage availability could unlock much of this pent-up demand.
We expect increases in household formation and homeownership to be greatest among younger adults who were hit hardest during the downturn.
Furthermore, the bulk of foreclosures between 2009 and 2011 will roll off consumers' credit reports over the next five years, which alone could result in up to five million homeowners returning to the market.
Lastly, much has been made of the possibility that boomers will depart their large suburban homes for cozier arrangements after retirement, leaving a mismatch between housing supply and demand.
However, we believe the millennials' apparent preference for renting and aversion to suburban life is likely to diminish with age and improving economic circumstances.
New home sales should experience an even more dramatic recovery than housing starts as homeownership rates normalize and new construction is sold rather than rented.
Though neither firm has an economic moat, both stocks trade at moderate discounts to our fair value estimates.
Weyerhaeuser has highly productive timberland holdings and a large lumber and panel business, which give it significant leverage to rising US lumber demand and Canadian lumber supply constraints.
Land-light NVR stands out as the only homebuilder able to produce economic profits and healthy free cash flow over a full housing cycle.
US Bancorp generates a high percentage of revenue from housing-related lines of business and is one of the most profitable banks we cover.
BB&T is particular leveraged to a rebounding housing market in the southeastern US. Fifth Third's exposure to manufacturing employment in the Midwest makes it a two-fold play on an improving economy.
Homeownership expansion and rising home prices should also buoy home improvement spending.
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