Is Home Ownership Dead for 20-Somethings?

A few reports out last week seem to suggest that the Millennial Generation, also known as “Generation Y” or the “Echo Boomers,” may not be participating in the renewal of home-buying that we have seen this past spring and summer.

The Millennials are the the 20-something children of Baby Boomers born after 1980 and, so far, have lagged far behind preceding generations in buying homes, despite low prices and historically low interest rates.

According to a recent Federal Reserve survey, the percentage of young people getting their first mortgages between 2009 and 2011 declined about 50% from 2002 levels.

So what gives? Has home ownership died for this generation, and, if so, what does it mean for their future and the future of homebuilder stocks? Let’s take a closer look:

Lack of Parental Help

To start, a lack of parental help in getting together funds for down payments or closing costs could be part of the problem. Baby Boomers themselves are struggling in this economy, as many have been laid off or have seen their companies downsized. And at the same time, they must put money away for their own retirement.

However, zero-down loans — such as the Veterans Administration or U.S. Department of Agriculture loans — are still available today, while FHA loans require only 3.5% down. In addition, sellers who have sufficient equity are usually willing to pay some or all of the closing costs, so it wouldn’t seem that difficult for young people to come up with the necessary funds to buy a home.

It’s more likely that Millennials are struggling financially as well and have incurred large debts in the form of credit cards, car loans or student loans, which prevent them from pre-qualifying given today’s tighter lending standards. Plus, the high-paying jobs of a decade ago are now being replaced by low-paying, entry-level positions, so debt-to-income ratios may be too high for many.

A Shift in Traditional Values

The post-World-War-II generation also took great pride in buying a home and raising their families in one place over a long period of time. My own parents bought their home in 1950 and didn’t sell it until 2004.

Their children — those Baby Boomers — followed suit by valuing home ownership just as much. However, a more mobile society and a few difficult recessions have led to shorter periods of owning the same home. It’s now typical for Boomers to move about every six or seven years, plus the 1996 elimination of taxes for most families on the sale of their primary residence also fueled a demand for more movement.

As the pace of society speeds up, this lack of permanence has been passed down from Boomers to Echo Boomers. Today’s generation has come to value the mobility that comes with renting, while home ownership is seen as a big anchor holding Echo Boomers back. They see more value in the ability to move at the end of a 12-month lease with no hassles.

What they aren’t seeing is the value in homes anymore, probably because those values have declined since the end of 2006. The Millennial Generation no longer believes homes will appreciate over time and they’re not buying the “but you own it at the end of 30 years” argument anymore.

In addition, many do not understand the political and economic forces that caused the glut of foreclosures that we’ve seen and fear that they, too, will buy and then lose their home.

This is unfortunate because home ownership is actually more affordable than ever, thanks to low prices and historically low interest rates. The 15-year mortgage, for example, has rates in the low 3% range. Granted, even 15 years may seem like a long time to a 25-year-old, but they need to understand that having a paid-off mortgage by age 40 will give them an enormous boost in being able to grow their wealth until retirement.

Amenities Galore

What’s even more alluring to the Millennial generation are the amenities that many apartments are now offering. Newer complexes now routinely offer in-ground swimming pools, exercise rooms, jogging paths, meeting rooms in clubhouses and more.

While these amenities are being paid for in the rent, and none of them are really “free” to the Millennial generation, they are highly valued perks of renting that make it even more difficult to make the transition from renter to homeowner.

Effects on Homebuilder Stocks

Unless there’s a change in the current trend, this generation’s preference to rent long-term doesn’t bode well for homebuilder stocks. For that reason, I don’t think homebuilder stocks are the best sector for long-term buy-and-hold investor. However, they’re still fine for investors who want to buy them on steep pullbacks and sell them after they seem extended.

Homebuilders like Lennar (NYSE:LEN), which I have talked about previously, are well aware of the changing demographics and are proactively building multifamily units and apartment buildings. In fact, much of the 20% jump in new construction nationwide is from new apartments, and the number of single-family detached homes being built has actually dropped by 14% year-over-year.

This is a bit risky for Lennar, though, because if something does happen to change the current trend, the company could find itself with a lot of half-empty apartment units in future years.

However, given a choice between building single-family units for a generation that’s expressing apathy toward owning versus building what will sell in the next few years, Lennar has probably made the best possible decision. It would seem that the apartment complex is here to stay for quite awhile for the Millennial generation.

As of this writing, Ethan Roberts did not own a position in any of the aforementioned securities.

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