The Big Housing Migration And How It Affects The Homebuilding Industry

So between 3.5 percent interest and 7.5 percent interest, which is really a huge leap in the world of mortgages, where things are calculated to 1/100 of a percent, you’ve lost over $67,000 of buying power. 

While low-interest rates can’t go on forever, Fed Chairman Jerome Powell reinstated the Fed’s intention to keep them low for the foreseeable future this week.

Millennials Are Finally Buying Homes

The millennial generation got a tough break. The price of student tuition rose, forcing many to take out student loans to pay for their education.

Right around the time when many were exiting college and entering the workforce, the global financial crisis hit.

Beyond short-term macroeconomic cycles, real wage growth has been declining precipitously since the 1970s, decreasing the buying power of millennials as a generation.

They’re also getting married and having children later and at lower rates. So it’s unsurprising to learn that millennials are buying less homes than previous generations were at the same age.

All of these are bearish long-term for homebuilders, but the tide is shifting. Perhaps, rather than forego purchasing homes altogether, millennials are simply doing so later, due to the macroeconomic factors detailed above.

This chart from Green Brick Partners’ (GRBK) recent investor presentation shows the momentum of millennial home buying:

Recent data from Ellie Mae supports this view, and that much of it is driven by younger millennials. To further compound this, housing inventory is plummeting, which pushes the prices of homes up.

New Migration Trends

Millennials are leaving expensive cities in record numbers in favor of suburbs, exurbs, and rural communities. It makes sense.

If they have the opportunity to work from home, they don’t have to pay the sky-high rents of the major job markets, and instead can find cheap housing outside of their city.

A report from HireAHelper found that these migration trends are concentrated in specific areas. Specifically, Idaho, Florida, and Vermont were some of the top destinations for pandemic-driven movers.

One of the key findings of the was the biggest regional winners and losers:

This data suggests that the homebuilders best positioned in the new growth markets created by this migration will benefit most from this demand rush.

Bottom Line

While this thesis is compelling, homebuilding stocks have never been the most attractive because of their cyclicality.

They’re extremely sensitive to changes in interest rates and the overall business cycle.

Also, many homebuilding stocks have run up to reflect this, making them potentially overbought in the short-term. 

From a long-term investment perspective, the thesis is questionable.

But it’s created several tradeable trends from those within homebuilders to building products, to regional companies poised to benefit from an expanded total addressable market.

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