Morningstar Magazine - June/July 2017 - 100

Investors

conservative, but they're also more diversified.
They have that rental property that they're
into; they have a separate finance business.
So that's interesting.

is probably quite a bit of delinquency there.
You're going to see that get repaired over the
coming years, and that should lead to better credit
scores and better credit availability.

in a luxury condo in a metro area. As for assisted
living, that's further down the line. We
would want to see people aging into their 70s
and 80s before worrying about that.

NVR NVR is the most capital-efficient business
out there, with very high ROICs. The problem
is that they have a pretty high exposure
just to the Washington, D.C.-Baltimore area, which
is about half their sales, so you have to
keep that in mind. Toll Brothers is a luxury builder
with very high average selling prices and a lot of
cash buyers, so people who are worried
about rising interest rates might feel comfortable
with them.

Partly because of this, demand for rentals remains high
right now. Are there investment opportunities there?

So, millennials are the main story right now.

Gross: Apartment REITs would be the best
way to play this, but when we look at the bigger
picture, we don't see as much opportunity
there. Rental rates have come up, but the
counterargument is that this has also brought
on quite a bit of new supply. As we start
to see more new developments come on line
in a variety of metro areas, there could be

Even with higher rates, these smaller
homes will be more affordable, so
will require lower down payments and lower
mortgage payments.
Brian Bernard

Gross: This is a broad-based recovery in terms
of wages, but it's even more significant among
younger adults, and these are the people
forming new households. Graduating from college,
meeting someone to marry, having kids are
all good catalysts for striking out on your own and
getting your own apartment or home. Ultimately
this is the group we think is going to be most
important to the housing recovery, and all the data
that's coming out on the macro side from them
has been tremendously positive.

If you dig a little bit deeper, looking past just a
median wage figure at personal incomes in a more
granular way for young adults-we specifically
looked at 25- to 34-year-olds-underemployment
has also been falling. The number of young
adults who are making less than $20,000 a year,
for example, has been falling meaningfully.
Everything seems to be panning out nicely. At this
point, we think we're certainly near the
inflection point where we're going to start seeing
the catalysts in place to move our housing
forecast forward. K
Laura Lallos is managing editor of Morningstar magazine.

What about the many young adults with low credit
scores? There's no longer an appetite among lenders
to give them credit.

some pressure in terms of the actual realized rents
on those new properties.

Bernard: Employment opportunities are improving
for them, and we think that they'll repair their
balance sheets, and that should help. That's the
main story, but if we have a more businessfriendly administration, perhaps we'll see some
loosening of credit availability as well.

How do older demographics play into the housing
analysis right now?

Gross: It's worth noting that credit scores are
partially time-based. The more distance
we get between the severe financial shock and
today, the better we're going to see that
median score get. And this is also where the wage
story comes in. Some of these credit scores
have been damaged because people were not
getting good jobs but had student debt, so there

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Morningstar June/July 2017

Gross: Probably the biggest question we
get is, what happens if the baby boomer generation retires and moves out of their homes?
What if they move into assisted living facilities?
The news overplays a lot of those movements.
When you look at the data for older adults, most
of them have lived in the same home for
20-plus years. There's a lot less movement within
those older cohorts than most people think.
There are anecdotes about older Americans moving
downtown to live the city life in a condo, but
this is probably not the median American. The
median American does not have the money to live
Table of Contents for the Digital Edition of Morningstar Magazine - June/July 2017
