Despite all the market volatility, the home-building sector (XHB) continues to outpace the broader market and the housing market continues to get a boost from low interest rates. And as it turns out — millennials may be providing a backbone to this upward trend.
John Lovallo, home builder analyst for Bank of America Merrill Lynch, told Yahoo Finance that the supply and demand imbalance that’s been happening over the past 10 years has been driving growth in the industry. He attributes lack of supply to a number of factors. First, land has been more difficult to get through entitlement in the development process; labor constraints; and the fact that homebuilders that got hurt during the last downturn are less likely to put inventory on the ground without a buyer in place.
In all, he estimates that it adds up to approximately 5 million units of “pent-up demand” in the system. Combine that with the fact that many millennials are now reaching prime home-buying age — 30 to 35 years old — and the industry has got “a big tailwind coming through.”
“I think it’s going to be huge,” Lovallo said. In 2025 there are going to be 3 million more millennials than baby boomers at their peak in 1987, he said. “That is going to be a really, really big support for the industry.”
Lower interest rates
Lovallo remains bullish on the sector. As investors continue to worry about a looming recession, the average 30-year mortgage rate sits at around 3.6%, according to Freddie Mac data, which is the lowest it’s been since 2016. In addition, the 10-year Treasury yield (^TNX) is currently at 1.55%, compared to 3.23% in November 2018.
And home price appreciation is now running closer to 3% year-over-year, compared to an average of 6% year-over-year over the past eight years.
“Every 25-basis-point decline in rates, on an average call $320,000 house in the U.S. is about $40 per a month,” he said, referring to how much a typical homeowner would save because of lower interest rates. “If you look at the year-to-date move, you’re looking at about $225 of savings per month, $2,700 per year – that’s real money. If rates are falling in the context of an economy that’s still ok, I think it’s good for the builders.”