Young People Are 'Hacking' Real Estate... Now, Stocks May Follow

Millennials are buying homes by hook or by crook...

An unaffordable U.S. housing market is forcing young people onto the sidelines. First-time homebuyers are being priced out, and the market has slowed as a result.

But it's a mistake to think housing is due for a crash. Just look at the rise of millennial "house hacking"...

House hacking is when you buy a home, move in, and then rent out some or all of it for additional income. It can help defray the costs of a monthly home payment. And according to recent data from Zillow, the practice is surging among younger generations.

A staggering 55% of millennial homebuyers said that the ability to house hack was a priority when they bought. Only 36% of Gen X respondents and 4% of Boomers and the Silent Generation gave the same answer.

Young people have accepted that prices aren't falling anytime soon. They're getting creative – and pragmatic – to get the properties they want.

In short, the demand for homes today is as high as ever... so much so, that it still trumps a prohibitive mortgage rate.

American housing isn't going anywhere. And today, the stock market seems to be waking up to that fact, too.

Real estate stocks recently passed a critical support level – which suggests the sector has room to run...

It has been a volatile year for the real estate sector...

I'm talking about the companies that conceive, design, manage, and operate America's buildings. These businesses are central to the American economy. And their stocks have been swinging wildly.

We can see this using the Real Estate Select Sector SPDR Fund (XLRE). This exchange-traded fund ("ETF") tracks a broad selection of real estate companies. So its moves reflect the sector as a whole.

From the price action alone, we can see investors have been piling in and out of XLRE since January. Take a look...

Investors have driven the price of real estate stocks up and down all year. In total, the sector has returned about 3% year to date.

But a more durable uptrend is underway for these companies, based on one technical signal. You see, XLRE just broke above its 200-day moving average (200-DMA)...

The 200-DMA is plotted out in red on the chart above. This indicator is exactly what it sounds like. It shows us the rolling average of the past 200 days of prices... which is a great way to show an asset's long-term trend.

But it can also serve another function – as a line of "support"...

That's because investors often step in and buy assets when they cross their moving averages. So prices often find a floor when they surpass the 200-DMA.

I wanted to test what this move meant for XLRE. To do that, I found every other time the fund crossed above its 200-DMA to see what the signal meant for future returns.

It's pretty rare for XLRE to make these kinds of breakouts. The fund has only completed this move 44 times since it launched in 2015. But when it does, it tends to be a good sign for real estate stocks going forward. Take a look...

History shows us that XLRE's 3% return this year is right in line with the average. But that return jumps significantly if you buy XLRE when it crosses above its 200-DMA...

Real estate stocks tended to pull back about 2% following this cross over the next three months. But they returned 3% on average in a six-month period... and 11% after a year. What's more, this signal led to positive one-year returns 61% of the time. So the odds are good that the sector will continue to rise.

Despite a volatile year, housing demand is as high as ever. Even the folks who are priced out of the market are finding creative ways to hack their way in.

Now, the stock market is starting to reprice real estate companies based on this demand. Simply put, XLRE's recent jump could be the start of a longer rally.

Good investing,

Sean Michael Cummings

Further Reading

"Home prices only have one direction to go from here... up," Brett Eversole writes. Many folks thought housing prices would collapse in 2022. Some still expect a serious decline. But one twist in the supply-and-demand story shows why U.S. housing is defying the naysayers... Read more here

Mortgage rates have soared. It's extremely difficult for homebuyers to find and afford homes today. But that doesn't spell doom and gloom for the sector – because prices aren't behaving the way you might expect... Learn more here.

Market Notes



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