When millennials finally buy homes, they invest in them differently
As millennials postpone life's major milestones, grabbing their attention has proven a bit elusive for home improvement retailers.
But now, as the older members of this generation start reaching the median age for first-time homebuyers, the industry is starting to see how their tastes differ from their predecessors — and likewise, how they'll need to evolve their businesses to suit these shoppers' needs.
Near the top of millennials' wish lists are smart, energy-efficient homes with an inspiring outdoor space. Yet most important for this cohort, which is already known for its desire to stand out, is finding a way to use their homes as a means of self-expression.
"[Millennials are] a lot more focused on bringing some personality into the home," Kevin Hofmann, Home Depot (NYSE: HD)'s chief marketing officer, told CNBC.
On a call with analysts in May, Home Depot CEO Craig Menear said millennials appear to be in a six-year delayed cycle for forming their own households. Indeed, the median age of first-time homebuyers reached 35 between 2010 and 2015, according to PwC. That's an all-time high since the firm started tracking this metric in 1970. And just last week, a report from the U.S. Census Bureau found the country's homeownership rate hit its lowest level since 1965 .
Yet even as the generation holds onto urban living as long as possible — namely, until they become parents and have to send their kids to school — they are showing an inevitable desire to move back to the suburbs, PwC's Byron Carlock said.
"It's really not a question of 'if,' but rather a question of 'when,'" said UBS analyst Michael Lasser, who has a buy rating on Home Depot's stock.
As older millennials — defined by Home Depot as ages 28 to 36 — begin entering their prime homebuying years, the retailer has already identified certain characteristics that set these shoppers apart from their elder counterparts.
For one, they are more inclined to invest in smart or energy-efficient technologies, Hofmann said.
They also expect a broader array of choices. For example, five styles of granite used to be sufficient, but the company may now have to offer 30 types, Hofmann said. That's where building out the company's online assortment comes into play. While Home Depot stocks some 35,000 units in its stores, that number expands beyond 1 million online.
It isn't just about assortment, Hofmann said. Millennials also want retailers to "cut through a lot of the noise," and be able to highlight the five most fashion-forward faucets for people living in Miami.
"It's this great challenge of endless assortment but with the right level of know-how and content curation," Hofmann said.
And thanks to the prevalence of inspirational Pinterest boards, instructional YouTube (NASDAQ: GOOGL) videos and aspirational home improvement shows, Home Depot's research has found that millennials are more interested in do-it-yourself projects than previous generations, Hofmann said.
"The general millennial taste trends toward light, airy and open as opposed to small square rooms," PwC's Carlock said. "That tells me that when they do buy [homes], they are going to spend and remodel."
Financials also play a role in this trend, as millennials are often saddled with student debt. That makes it easier for them to purchase an older home for less money up front, and pay for improvements as they go. Not only that, but securing the financing to purchase a home is harder than it was for previous generations, Hofmann said.
And with the median age of a home on the rise — it increased from 31 to 37 in the 10 years ended 2015, UBS' Lasser said — many of the houses millennials purchase will require more TLC.
"Homes are getting older, and older homes should require more spending," he said.
Though Home Depot does not disclose what percentage of its sales come from millennials, Lasser predicts the generation will start to play a bigger role in its financials over the next five to 10 years. Still, Hofmann admits millennials' revenue contribution likely won't surpass that of baby boomers and Generation X for another 10-plus years.
Investors don't appear to be concerned. Home Depot's stock briefly hit an all-time high of $139 a share on Tuesday, thanks to strong housing market fundamentals and company-specific initiatives, including a more efficient supply chain. The retailer was likewise initiated with a "buy" rating from Stifel.
"We're still in a good part of the [housing] cycle," said Lasser, who has a $150 12-month price target on the stock. "Home Depot could continue to grow at a low- to mid-single-digit clip for a few years."
For more, tune into CNBC's "Closing Bell" on Tuesday for an exclusive interview with Home Depot CEO Craig Menear.
Correction: This story has been updated to reflect the proper spelling of Kevin Hofmann's name.
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