Millennials Crimping Homebuilder ETF Recovery
August 5th, 2014 at 9:30am by Tom Lydon
The construction sector and homebuilder-related exchange traded funds probably won’t find support from the rising number of millennials who have shunned new home purchases.
The American home ownership has declined to 64.7% in the second quarter of the year, the lowest level in 19 years, due to rising home prices, increased student loan debt, higher mortgage rates and changing life styles, CNBC reports.
Adding to the downward trend, younger Americans have eschewed purchases and are willing to wait longer. According to the National Association of Realtors, the typical age of first-time home buyers in 2002 was 31. In a Zillow survey of over 100 economists and real estate experts, respondents expect the the age to hit 34 or older over the next decade.
“The millennial generation will have enormous influence in coming years, especially as they hold off on getting married and having children, the two biggest reasons for first-time home purchases,” Zillow chief economist Stan Humphries said in the article. “A lower homeownership rate because of these demographic shifts will have a ripple effect, keeping rents high and potentially impacting the broader economy if substantially fewer people pay property taxes and buy fewer home goods.”
For instance, along with exposure to home construction companies, the SPDR S&P Homebuilders ETF (NYSEArca: XHB), iShares U.S. Home Construction ETF (NYSEArca: ITB) and PowerShares Dynamic Building & Construction Portfolio (NYSEArca: PKB) also include allocations toward home improvement, furnishing and appliances retailers. ITB has the largest weight toward home construction firms at 64.2% of the ETF’s portfolio. [Homebuilders ETFs Still Contending With Tepid Data]
Employment has been a major hurdle for the millennials. Among those between 25 to 34 years old, employment fell to 75.6% in July from 75.8% in June.
“Young-adult employment is less than halfway back to normal: Before the bubble, their employment-population ratio hovered in the 78-80 percent range,” Jed Kolko, chief economist at Trulia, said in the article. “Having a job matters for housing. Just 12 percent of employed 25-to-34-year-olds live with their parents, versus 20 percent of 25-to-34-year-olds without jobs.”
According a a recent survey conducted by Fannie Mae, the majority of young adults living with their parents will likely rent rather than buy when they do move out.
Consequently, investors may consider a residential real estate investment trust ETF to capture the greater rent growth. For example, the iShares Residential Real Estate Capped ETF (NYSEArca: REZ) includes a 43.9% weight toward residential REITs, along with 54.1% allocation toward specialty REITs, which include companies that provide storage space. [Residential REITs ETF Stands Out In Financial Sector]
For more information on the housing market, visit our homebuilders category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.