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Millennials are threatening this important sector

Lawrence Lewitinn
Lawrence Lewitinn
Talking Numbers

The economy may be picking up ever so slightly, but there’s one segment of the population that still lives in their parents’ basement and that may crimp the future growth of a major sector in the economy.

According to the U.S. Census Bureau, 17.7 percent of men aged 25 to 34 years old and 11.7 percent of women in the same age group live at home with mom and/or pop. That’s the highest percentage since such records began being kept three decades ago.

And if millennials aren’t moving out of their parent’s home, that means there are fewer buyers or renters for apartments and homes in the United States. The fact that millennials are taking more time to start a household, and buy a home, is one of the reasons why Jeff Gundlach called on shorting the home builder ETFs last year.

With the stats further backing up Gundlach’s thesis, another portfolio manager is saying investors should sell the ETF tracking home construction companies (trading under the ticker symbol ITB).

“We would be sellers of ITB,” said Chad Morganlander, portfolio manager at Stifel Nicolaus. “We would avoid the sector altogether.”

Morganlander sees a few headwinds for homebuilder stocks.

“You still have a deleveraging cycle that is happening within the households,” he said. “A primary example is that mortgage debt has actually been declining. That’s something that is an anomaly.”

The lack of growth in household income also worries Morganlander. According to the U.S. Census Bureau, median household income may have moved up a little bit from last year, but it is now where it was 20 years ago. In 2013 (the most recently reported year), median household income was $51,939, almost 8 percent below its 2008 peak of $56,436.

“You have income growth that has been well below trend,” he said. “So when we talk about this ebullience within the overall economy, we have to put this into perspective.”

And though the “headline” U.S. unemployment rate is at 5.4 percent, the underemployment rate (the “U6” rates) is currently at 11.2 percent, according to the Bureau of Labor Statistics. That may be lower than the 16.9 percent it was showing in November 2010 but still not at the sub-10 percent levels enjoyed for several years before the financial crisis began.

“When you couple all this together, you can see the reason why total household sales and getting into a house is becoming a very difficult task for the millennials,” Morganlander said.

Yet not every trader is down on homebuilders. The chart work of Mark Newton, chief technical analyst at Greywolf Execution Partners, shows the ITB to be a buy.

“In this environment of low yields and particularly the recent upsurge in momentum since October of last year, homebuilders represent a good risk/reward in this market,” Newton said. “We should start to see the group start to move higher in the weeks and months ahead.”

Newton says the ITB has been relatively range-bound since 2013. Though the ETF failed to break above resistance at the $27 level, “they held near $24 and they are starting to stabilize,” he said. “That one thing would suggest that they are a good group to potentially take a look at.”

A longer-term chart of the ITB gives him even more optimism. “They are still 50 percent off the highs that they made back in 2005-06,” said Newton, who now sees the ETF as forming a base over the past couple of years. “If anything, these bases after big run-ups oftentimes provide a decent area to take a look at buying with a chance of these moving back to the upside.”

But for Newton, the most important chart of the ITB is one that graphs the ETF’s price divided by that of the S&P 500. That shows the homebuilder stocks’ relative strength to the overall market.

Between 2011 and 2013, the ITB strengthened versus the S&P 500, as indicated by an uptrend in the graph. It subsequently underperformed the market but has now broken above what Newton sees as downtrend resistance.

“For the first time homebuilders are starting to gain some traction,” he said. “They are a good group. They are very much under-owned. There is a lot of pessimism in the sector with yields continuing to fall daily. And if anything, the [homebuilder] stocks are starting to act a lot better just of late. So I like them.”