You engaged in all the extracurriculars, volunteered, curried favor with teachers for good recommendations, studied instead of partying. Once you got into college you kept up the pace. Rinse and repeat. The glorious day of getting that college diploma arrives. Yay!
Six months later comes the letter with your student loan payment particulars. If you’re the average college graduate that bill totals over $26,000. If you can find a job you will be facing a lower credit score, generally 15 points lower than your classmates without student loan debt. And that little house or condo that should have been waiting for you at better interest rates than ever after a few years on the job… dream on.
The new poorhouse
But I don’t have student debt, my kids don’t have student debt. Why should I care?
As an investor that student loan bill comes to you indirectly, especially if you hold homebuilders. Homebuilders exposed the most to the starter home market are going to be the most adversely affected by youth delaying buying a home for a decade or never buying at all. The New York Federal Reserve came out with disturbing results that for the first time in decades those without student loan debt are now participating in the home mortgage market more than the formerly higher-income student loan borrowers.
The homebuilder stocks have been outperforming, but as the Fed and the Financial Stability Oversight Committee warn, the student loan crisis will be affecting the economy adversely over the next three years. The average student loan debt balance has rocketed up 91% since 2003.
After this shock to the system, it should come as no surprise that even without student debt Millennials are 25% more likely to admit they don’t have enough money to pay for basic necessities and at the same time more likely to throw around any discretionary income that comes their way. Put it all together and that spells…poorhouse.
Homebuilders most at risk going forward would be Beazer Homes USA, Inc. (NYSE:BZH) and KB Home (NYSE:KBH). Although existing homeowners trading up are part of the housing rebound as cited by Meritage Homes Corp (NYSE:MTH) CEO Steven Hilton on their earnings call the starter home and first time buyer market will also be impacted by the rising prices Ryland Homes said on its earning call it was able to charge.
Since 1957 the company has delivered 500,000 homes. Habitat for Humanity, interestingly enough, recently surpassed that milestone since its founding in 1976.
The short interest in KB Home (NYSE:KBH) is a whopping 28.2% and the profit margin is a negative 1.5%. Return on equity is also negative at 5.91%. The EV/EBITDA is a staggering 105.54. Analysts are fairly negative on the name with 18 at hold, underperform or sell compared to 5 buys and 2 strong buys.
Beazer Homes USA, Inc. (NYSE:BZH) is similarly unprofitable with negative EPS of $7.99 (ttm) and a profit margin of 15.64% and return on equity of -70.1%. Short interest is higher here at 31% and growing.
The stock has significantly underperformed its homebuilding brethren and is only up .91% over the last year.
Both KB Home (NYSE:KBH) and Beazer Homes USA, Inc. (NYSE:BZH) have negative operating cash flow and large debt burdens. That said, most homebuilders carry debt; it’s part of doing business.
Finally, another homebuilder to avoid is Hovnanian Enterprises, Inc. (NYSE:HOV). It has already run 172% this last year despite negative EPS of -$0.44 (ttm) and a negative profit margin of 3.76%. Although it has some exposure to the luxury market it also caters to that first time buyer.
Its five year PEG is 10.58 based on a forward P/E of 11.58. With founder Ara Hovnanian as CEO and Chairman and the Hovnanian Enterprises, Inc. (NYSE:HOV) family holding almost five million shares altogether it’s not surprising the corporate risk governance score for shareholder rights is the highest (meaning worst) at 10.
Analyst opinion is bearish with 1 strong buy to 7 holds, 2 underperforms and 1 sell. The short interest has been growing and stands at 29.9%.
The new richhouse
Most of the homebuilders have been decidedly upbeat, practically giddy, on their conference calls as Fellow Fool Morgan Housel notes with excerpts from several calls. The one with the most reason to be carefree would be Toll Brothers Inc (NYSE:TOL)
Toll Brothers is the homebuilder most correlated to the luxury market. Whether single family or apartment all its homes are meant for the luxury market or second-home buyer. It’s also involved with building golf courses and country clubs. They are definitely not the homebuilder catering to that first time buyer of a starter home.
Its P/E is a reasonable 11.73 and has a 1.06 PEG. In an unusual upgrade Barclays took Toll Brothers Inc (NYSE:TOL) from Underweight directly to Overweight on April 23. Analysts expect 39.17 five year growth and have a price target of $36.00 for less than 10% upside.
Toll Brothers has a positive return on equity of 17.21% and a profit margin of 24.90%. The stock is up 34.84% over the last year.
The co-founder Toll brothers, Robert and Bruce, hold over $10.5 million shares between them. With a strong show of conviction by founders, great growth rate, low PEG (although not undervalued), and exposure to clients who have the means and the credit available to buy, Toll Brothers Inc (NYSE:TOL) is the best of these homebuilders.
A Bleak House picture
It is beginning to sound a bit doomsdayish and Dickensian for Millennials. The student debt problem isn’t going away, not when universities raise tuition by double digits. The best thing to do as an investor is not to lose money in these starter homebuilders and make money elsewhere for a college fund. Don’t forget to clear out that spare room for the recent college grad moving back home.
The article Welcome to the New American Poorhouse originally appeared on Fool.com.
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