Millennials Graduate From Parents’ Basements Into Smart Homes – Nasdaq

At 80 million strong, millennials – adults born between 1981 and 1997 – are now the largest age group within the U.S. population . And while popular lore portrays them as a generation largely living in their parents’ basements and glued to their smartphone and computer screens, recent data from one of the country’s largest homebuilders contradicts at least part of that picture.

In fact, Atlanta-based Pulte Group ( PHM ) – the third-largest U.S. homebuilder by revenue – says its research shows that a majority of millennials, 58%, are already homeowners. And more than half, or 55%, intend to buy a new home in the next three years.

As a result, the company has begun gearing up for what it sees as a looming wave of homebuying demand from a new generation of consumers. It’s a fact that is quietly boosting analysts’ outlooks on homebuilding stocks, even after hurricanes upended two of the country’s top housing markets and frustrated an already long, bumpy recovery – as well as efforts to assess and forecast the industry’s progress.

But despite the uncertainty and upheaval, investor confidence has been largely unfazed. Positive quarterly results from both KB Home ( KBH ) and Lennar ( LEN ) recently bolstered the industry’s broad rally, sending both stocks into buy zones.

Peers D.R. Horton ( DHI ), Toll Bros. ( TOL ) and LGI Homes (LGIH) also marched past buy points, marking just the latest leg in one of the best run-ups among homebuilder stocks in years. And while the pace of new homes being built still lags well below its pre-recession peak, the benchmark Philadelphia Housing Sector Index in September broke to a new high, its first foray onto new high ground since 2005.

To be sure, there are stragglers within this group. But most of the marquee homebuilders’ stocks have hammered out hefty gains so far in 2017. NVR (NVR) vaulted 72% through Thursday. Pulte has punched out a 102% advance. D.R. Horton has soared 49%.

Among smaller-cap names, LGI has sailed ahead by 81%, followed by KB Home ( KBH ) with a 62% surge.

As a whole, the two dozen homebuilding stocks tracked by Investor’s Business Daily have advanced 64% since the start of this year. That lifted the group to a No. 6 ranking on Thursday among the 197 industry groups tracked by IBD .

“People recognize the fact we’re not back to the norm” in terms of new house construction, said Brian Bernard, an industrials equity analyst at Morningstar. “There’s still a lot of runway there, and they’re trying to play that.”

Millennials A Homebuying Force

After the recent run-up, Bernard finds most homebuilding stocks to be fairly valued. Still, he sees pockets of opportunity in select names.

Pulte taps a theme that Bernard says is key to his bullish outlook on the industry – pent-up millennial demand.

These young Americans are now maturing into consumers keen to own home s , studies show. In fact, according to a recent survey, this year’s huge jump in demand for first-time homes has been driven by millennials.

The group is starting to earn more and gain job confidence. That makes them a prime target market for homebuilders going forward, experts say.

Pulte Group’s Centex and Pulte Homes brands, which target first-time and move-up buyers, are adapting as they market to this demographic. The company sees younger homebuyers as very open to selecting their future designs using newer methods, such as shopping through virtual reality.

Virtual reality (VR) headsets and gaming controllers allow homebuyers to “experience” multiple floorplans before making a choice, Pulte Group says. Consumers get a sense of how the individual spaces flow together as they take a self-guided “walk” through homes, with images projected on large-screen TVs. They end up feeling much more confident about their buying decision, while the “coolness factor” of VR technology is driving traffic and sales, the builder adds.

(Pulte Group declined an IBD interview request, citing a quiet period before its quarterly earnings report on Oct. 24. NVR, whose Ryan Homes and NVHomes brands also target first-time and move-up buyers, declined an interview as well.)

For homebuilders, innovation is a necessity as millennials become one of the fastest-growing real estate constituencies. This generation is eager for “smart” home technologies and energy-efficient homes, so Pulte has showcased what it calls a “zero net energy” prototype home in California that it claims is capable of erasing its carbon footprint.

In another new and novel strategy , Lennar wants to ease a key barrier that has kept debt-laden millennials from owning homes. The company says it will contribute up to 3% of the home purchase price toward the student loans of new Lennar homebuyers, capping payments at $13,000.

Puzzling Homebuilding Activity

While a new-look, millennial-driven housing market is driving excitement about the future, the industry’s current mood remains tentative.

Homebuilding activity in the U.S., measured in housing starts, hit its high this year in February. After a brief blip up in June, momentum slowed over the summer. Then hurricanes clawed through Texas and Florida, raising fears that labor shortages and material costs could worsen in those major housing markets, and cut into homebuilders’ profits.

Builder confidence dropped in September, as measured by the National Association of Home Builders/Wells Fargo sentiment index. Recent housing data has been mixed. New-home starts crept 0.8% lower in August, marking the fifth consecutive month of declines. Existing home sales also slipped last month. Building permits surged, but returned only to the level reported in January.

The retreat in housing starts owes partly to a weakening cycle in multifamily construction, generally a positive for homebuilders. But even the trend in single-family starts has moved lower in three of the past five months, according to IHS Markit.

“Homebuilders are more pessimistic about the housing market after the hurricanes,” Kristin Reynolds, an IHS Markit associate director, wrote last month.”The states of Texas and Florida often rank first and second (or third) in the number of building permits, and together the two states average nearly a quarter of national authorizations.”

Lennar and D.R. Horton, the two largest homebuilders by 2016 revenue and home closings, are most exposed to the Houston market, according to Bernard. But Lennar said storm damage to its affected communities was minimal overall, and underscored that recovery efforts should spur local construction in the months to come.

“Once we get past the short-term impact from the storms, there will be increased economic activity and an increased demand for new homes,” Lennar CEO Stuart Miller said Tuesday, while reporting a better-than-expected quarterly profit.

(The Florida-based builder declined an IBD interview request.)

Meanwhile, larger rival D.R. Horton slashed its cash-flow guidance for fiscal 2017 in the wake of the storms. But the homebuilder said it does not expect the hurricanes to affect fiscal 2018 guidance, promising more detail when it reports in November.

Marrying Millenials Desires

Given the overall health of the economy, it’s a bit of a mystery to many industry watchers why new home sales, as well as housing starts and permits, are falling and remain low by historical standards.

Incomes are rising in the U.S., the job market is growing and consumers are gaining confidence. All of this, together with a stock market that continues to mark new highs, should fuel growth in the housing market.

But these positives are offset by the low rate of household formation in the U.S., a factor that economists pin on millennials.

“Young adults are living with their parents (or with more roommates than they care to have) for longer periods of time than in the past,” IHS Markit’s Patrick Newport wrote recently, describing this as “the most likely reason” why home sales and housing starts continue to underwhelm.

Still, average interest rates on mortgages generally remain below 4%, a healthy fundamental for homebuilders. While rates are poised to rise next year, the hikes are expected to be slow and gradual.

Bernard is among the group that expects higher rates could possibly “get people off the sidelines,” making them inclined to buy homes now, while mortgages remain relatively affordable. And in perhaps the most promising sign for homebuilders, the household-formation rate is starting to rise.

That throws up new opportunities as well as challenges. Homebuilders have drawn criticism for not producing enough starter homes and for being out of touch with the housing market. Demand is on the low end, where there are too few homes, CNBC recently reported , while the homes that are available are very expensive.

Robert Dietz, chief economist at the National Association of Home Builders, argues that rising costs of land, labor, materials and regulatory compliance forced builders to target the higher end of the market. But the strategy is starting to change, he adds, with more homebuilders experimenting with entry-level homes.

“You see that in the strength in townhouse construction,” Dietz told IBD, explaining that townhomes marry millennials’ desire for single-family homes with the reality of their financial conditions that allow for something less.

If homebuilders are cracking open pent-up demand for starter homes, they may have D.R. Horton to thank.

The company launched its Express Homes brand in 2014 to target the price-conscious, first-time buyer, one of the first in the industry to do so. An Express home costs $226,500 on average, and this affordable brand is where D.R. Horton is seeing its most impressive growth.

The unit accounted for 33% of total homes closed and 25% of sales revenue in the latest-reported quarter. That is up from 28% and 20%, respectively, a year ago. Express Homes operates in 53 markets across 17 states.

Morningstar’s Bernard calls the brand a bet that has paid off for D.R. Horton. He said it has outperformed initial expectations and given the company a first-mover advantage in a critical growth market.


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