Millennials have overcome Baby Boomers to become America’s largest demographic … even better, they’re powering big gains in this investment sector
Psychology Today puts it bluntly:
Millennials, born between 1980 and 2000, are often derided by older generations as selfie-stick wielding, “Keeping Up with the Kardashian’s”-watching, soft-in-the-middle whiners.
Wow. Tell us how you really feel …
Obviously, that characterization is broad-brush and open to debate. But what isn’t debatable are a handful of realities …
· Millennials have now overcome Baby Boomers to become the largest living adult generation
· Millennials are beginning to enter their highest-earning years in the workforce
· Millennials, though slower than past generations, are finally beginning to move into single family homes
These facts are driving a key investment reality that you and I can benefit from today: We’re standing at the cusp of major long-term wealth creation that’s going to come as millennials power a new housing boom.
This is the subject of Matt McCall’s latest issue of Investment Opportunities that came out just last week. For any newer Digest readers, Matt is a thematic investor. In other words, he identifies major trends that are re-shaping our world, and by extension, the investment markets. He looks to find the investing implications of these trends to ride them higher for years.
Here’s Matt for the top-line summation of the opportunity before us:
Whatever your opinion personally (of Millennials), as investors we need to focus on one astounding fact: We are witnessing the beginning of the greatest wealth transfer in U.S. history from the once-dominant Baby Boomers to the emerging Millennial generation.
Investors who are smart enough to realize this and the immense potential this major demographic shift holds can benefit early and often.
So, turn off The Kardashians and put down your selfie-stick, and let’s dive into the most recent trend that’s in Matt’s crosshairs so that we can position ourselves today for big returns tomorrow.
***Move over Boomers, the Millennials are taking over
Matt begins his issue by revisiting the Boomers, detailing the enormous effect they had on the U.S. economy and society at large. They earned record salaries, generated record wealth, created the suburbs, and helped start many of the mega-trends that we invest in today.
But Boomers can no longer claim the title of “biggest” demographic. From Matt:
With 73 million people, Millennials now account for 22% of the U.S. population and have overtaken the baby boomers. The most widely used definition of a Millennial is someone born between 1981 and 1996. That puts them between 23 and 38 years old right now …
What’s more, they are at a similar point to the Boomers after World War II as they begin to form families and buy houses.
At this point in his issue, Matt begins to make the case for Millennials and a new housing boom.
To begin, we have to understand that Millennials are different than prior generations — most notably, they’ve delayed marriage and starting families, and many have continued living with their parents far longer than past generations.
The financial crisis in 2007-2008 hit many Millennials just as they would have typically begun forming families as prior generations did. After the housing crisis, it’s little wonder they have a bad taste in their mouths about buying homes (and investing, sadly).
Many Millennials rented or lived at home longer than previous generations. Even last year, 15% of Millennials still lived with their parents. At the same age, only 9% of Gen Xers lived with their parents.
Matt goes on to say that another statistic that surprised him was that only 16% of Millennials moved in the past year. In previous generations, about 25% moved at the same age.
But things are now beginning to change. Matt notes that moving for the right job or improved quality of life will become a priority for Millennials. And that will lead to a boom in housing demand, especially in cities that offer affordable costs of living and plentiful job opportunities.
Here’s the takeaway:
With Millennials starting families, making more money than ever and starting to move more frequently, housing is my favorite way to profit from the country’s largest generation.
***Two additional catalysts behind the coming housing surge
One of the positive side effects of the Fed lowering rates is that it also lowers mortgage rates, making housing far more affordable. While home prices themselves may not be at extreme discounts these days, the reality that financing is so inexpensive that it is a huge tailwind to new home purchases.
Mortgage rates have dropped sharply since hitting an eight-year high last November, and quite simply, lower rates make homes more affordable to potential buyers …
We see this in the chart below, which shows the falling 30-year mortgage rate (the blue line) and rising number of mortgage originations (the orange line).
What’s fascinating about this chart is that mortgage originations fell to their lowest level since mid-2014 earlier this year. Now they’re back on the upswing. Also, note that the last time rates were this low in 2016, mortgage originations spiked above $600 billion.
It’s likely that rates are going to stay low for the next few quarters — possibly falling lower. As I write, the CME Group’s FedWatch Tool is putting the odds of another quarter-point cut from the Fed at 91.2% by the 9/18 FOMC meeting.
If we get that cut, it’s reasonable to assume it will put more pressure on mortgage rates to follow suit.
Matt tells us that this points toward a continuing spike in mortgage originations. And if history repeats itself, a move from $344 billion in the first quarter of 2019 to the previous peak over $600 billion would be massive … and significantly boost homebuilders and housing-related stocks.
As to the second catalyst behind housing growth, Matt points toward the decline in the number of U.S. homes for sale.
Inventory, or the number of homes for sale, has been on the downswing for years (see the blue line on the chart below). A recent rollover on the chart suggests the amount of homes on the market will continue to fall.
At the same time, the number of U.S. housing starts (the orange line) has increased for the last decade. The inverse relationship makes sense. As the number of homes for sale falls, homebuilders are incented to build new homes.
So, what’s the result of all this? Matt tells us it’s higher revenue for homebuilders, leading to higher stock prices. And this is precisely why housing stocks recently broke out to their best level in over a year.
Here’s the takeaway for us: Over the last 10 years, when mortgage rates fall to this level and home inventories turn lower, investors make money in housing stocks.
***So, how do we play this?
Well, as we just read from Matt, the primary play he likes are the homebuilders themselves.
The chart below from Matt’s issue shows the U.S. 30-year mortgage rate (the orange line) versus the performance of the iShares U.S. Home Construction ETF (the blue line) over the last decade.
When mortgage rates dip below 3.6%, housing stocks rally. It’s happened two other times in the last 10 years, including now, and each time the ETF moved higher in the months and year ahead.
Now, while investing in the iShares U.S. Home Construction ETF would be a broad-brush way to play this housing boom, it’s not the most explosive way. That’s because when you invest in an ETF, you’re investing dozens, if not more, individual companies — many of which may not be top-shelf businesses.
This is why Matt’s preferred way to play this Millennial housing boom is a specific homebuilder. Out of respect for Matt’s Investment Opportunities subscribers, I can’t reveal it at this point, but it’s not just your standard homebuilder — rather, it’s a targeted way to play Millennials.
Nearly three-fourths of this builder’s second-quarter sales were entry level and first move-up homes. It’s also selling homes in hot housing markets where prices are above national averages. Best of all, Matt walks subscribers through this company’s current valuation which, coupled with its earnings projections, points toward a potential gain of about 85% over the next two years.
To learn more about Investment Opportunities and Matt’s favorite housing pick, click here.
As we wrap up, huge trends originate in many ways — a new technological breakthrough, a sudden structural change such as a law or reform, and in this case, a massive cohort of the population transitioning from one stage of life to another.
Here’s Matt for the final word:
They may have waited longer than their forerunners, but (Millennials) will have a huge impact as they dominate the economy for the next decade or more. It’s time to get in position to make our money.
Have a good evening,