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How Millennials Could Hurt These Stocks

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The Millennial generation of young adults has gotten a lot of attention lately, as they've faced the huge challenge of coming of age in a time of extreme economic pressure and hardship. A recent study shows that all in all, they're handling the situation fairly well, but the actions they're taking have big implications not just for them but for the companies that are hoping to get their business both now and in the years to come.

Handling financial triage
The Pew Research Center released a report yesterday that showed how people of various ages responded to the financial crisis. The surprising conclusion was that from 2007 to 2010, those age 35 or younger did a far better job of cutting back on debt than their older counterparts.

To do so, Millennials had to face the burden of student loan debt. Indeed, the report highlighted student debt as the only type of debt to become more common during the three-year period. Yet the median balance outstanding on student loans also fell by roughly 5% to $13,140, indicating increasing awareness of what has now become a key discussion about the value of a college education compared to its cost.

More interesting, though, were the major shifts in financial behavior that Millennials made to get their debt levels down. In particular:

  • Millennials were much more likely to give up ownership of a home, with the proportion of young homeowning households falling from 40% to 34%. Moreover, mortgage debt levels fell dramatically, from $150,000 to $128,000.
  • How Millennials handle vehicles also had a big impact, with a decline of 7 percentage points in car ownership rates and an even bigger drop in vehicle debt. Median car loan amounts fell by $3,000 over the period to $10,000.
  • Even credit card use has declined among young adults, with 39% of Millennials carrying a balance. Average amounts owed also declined nearly 20% over the period to just $1,700.

Admittedly, these prudent financial moves only undid part of the damage from earlier in the decade, as young adults got into increasingly dire money straits from 2001 to 2007 as the bubble economy encouraged profligate financial behavior. But in such a tough economic environment, it's impressive that even with high unemployment and rampant underemployment, Millennials have made this much progress toward cleaning up their personal finances.

The future fallout
The question, though, is whether these trends will continue. If they do, then they'll have a lasting impact on several industries that make up a big part of the U.S. economy.

First and foremost, the housing industry brought on the financial crisis, and returning it to its former health has been a priority of economists and policymakers. Yet with more young adults choosing to rent instead of buy, the challenge for homebuilders will be to adapt. Already, Lennar (NYSE: LEN  ) has added multifamily projects to its single-family construction, and both Lennar and Beazer Homes (NYSE: BZH  ) have bought up inventories of foreclosed properties in the interest of renting them out rather than reselling them. Continued interest could boost those stocks further.

Second, on the vehicle front, lower sales of cars and trucks could help Zipcar (UNKNOWN: ZIP.DL2  ) and buyer Avis Budget, as well as others seeking to offer car-sharing services to renters. As long as car use stays high, fleet sales to car-sharing companies may help support automakers' businesses, albeit perhaps not at the same margins they enjoy on direct sales to customers through their dealer networks.

Finally, falling credit card debt will inevitably weigh on big card issuers Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) . With rates on other debt at very low levels, credit cards remain the one reliable source of plentiful interest income, and as delinquency rates have fallen, the business has gotten more profitable. Credit cards represent more than half of Citi's total consumer loans outstanding, and for B of A, cards produced $6.3 billion in pre-tax profit during 2012, one of the bank's most profitable segments.

Good news and bad news
What's bad news for investors, though, is good news for the Millennials themselves. With a background of taking financially responsible actions, Millennials may well be setting themselves up for great financial success if the economy ever gets back on an upward track.

Will B of A find other ways to profit?
Even if young adults get more fiscally responsible, Bank of America has plenty of growth opportunities. Learn more about whether Bank of America is worth a closer look by reading our latest research from bank analysts Anand Chokkavelu, CFA, and Matt Koppenheffer. Together, they lift the veil on the bank's operations, including three reasons to buy and three reasons to sell. Click here now to claim your copy, and as a bonus you'll receive a full year of FREE updates and expert guidance as key news breaks.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 22, 2013, at 3:23 PM, questioner5000 wrote:

    The Millenials have reduced their debt load, but do you necessarily mean that they PAID DOWN their debt load?

    Are debts reduced while living with Mom and Dad? Are debts reduced by parents paying down tuition loans, (whether or not they're on the hook as Guarantors)? Have Millenial debts dropped by their defaulting on their condo mortgages and/or credit cards or "negotiating" debt reductions/forgiveness?

    There are lots of "less than admirable" ways to "reduce" debts, but only one way to pay down debts.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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