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    This Old Housing Recovery

    After a decade of slow growth, millennials are poised to buy homes.

    Laura Lallos, 06/14/2017

    The road to a housing recovery has been a long one, but Morningstar’s analysts are optimistic about what lies ahead. In a mid-March research report on the housing outlook,1 they offer best ideas among housing-related stocks— including Williams-Sonoma WSM and Bed Bath & Beyond BBBY, discussed in last issue’s Sector Rap—and explain the variables underlying their outlook. Millennials are a driving force, so much so that they recently devoted a report to household formation among younger adults.2

    To explore their findings, I sat down with two of the contributing authors. Charles Gross is a basic materials analyst who chairs Morningstar equity analysts’ U.S. housing committee, and Brian Bernard is an industrials analyst who covers homebuilders. The conversation, which took place on April 4, has been edited for length and clarity.

    Laura Lallos: What has hindered the housing recovery?

    Charles Gross is an equity analyst who covers basic materials for Morningstar Research Services.

    Gross: When we look at the data series of starts going back to just after the Great Depression, basically, we do not see a decade this weak in housing. I think what happened is the global financial crisis severely hurt younger adults, and disproportionately so. You saw higher unemployment rates, you saw lower wages, and those things have taken a long time to get back to where we were even 20 years ago or so. As a result, there’s been the decade-long delay we’ve seen, sort of a spring getting compressed.

    But now you foresee robust residential construction growth. What’s driving that?

    Gross: Ultimately, it’s the unwinding of a lot of the factors we’ve seen. Pent-up demand over the past decade will slowly start to be realized over the coming decade. When we look out right now, we see labor markets are substantially tighter than they have been. We’ve seen that turning point since roughly about 2014, to where job openings, for example, are back at early 2000 highs at this point. That’s resulting in much stronger wage growth. So, we’re finally seeing young adults essentially converge on the median American, in the sense that they have much lower unemployment rates, as well as underemployment rates, and meaningful inflation-adjusted wage growth. As those things come to fruition, we see those propelling headship rates, the portion of adults that are a head of household. Young adults are able to move out from their parents’ basement, if you will, and get their own place, whether that’s an apartment or house.

    How are homebuilders appealing to millennials?

    Laura Lallos is a former Morningstar analyst and editor, and a frequent contributor to Morningstar Advisor magazine.