This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

DoubleLine's Gundlach Bleak on Home Ownership

NEW YORK (TheStreet) -- Jeffrey Gundlach, CEO and CIO of DoubleLine on Monday presented compelling reasons to short homebuilders as he offered a bleak picture of home ownership.

Speaking at the 19th Annual Sohn Investment Conference produced in partnership with Bloomberg LINK, Gundlach said a lot of people think that the U.S. home ownership rate is going to rebound. However, he said he's able to make the case that this is not going to happen after digging deeply into the health of the U.S. credit market, the supporting factors behind the housing market, affordability trends, and Americans' wages and income. "My theme today is frankly I believe that single-family housing is over-believed and overrated over the long-term ... I believe this is going to new lows."

In light of this, Gundlach suggested shorting the XHB. "The homebuilder ETF (SPDR S&P Homebuilders) (XHB) has gone up an awful lot. It seems to be potentially rolling over. It looks particularly bad when you compare it to something that it should be highly correlated to, which is lumber. The homebuilding index sitting out there is looking a little bit like it's in trouble, sort of like Wile E. Coyote, who's off the cliff but hasn't begun to fall." The SPDR S&P Homebuilders ETF settled down more than 1% on Monday.

His first point in his presentation focused on the "false" belief that the home-buying public and the American consumer somehow deleveraged and is now in a good position to start borrowing again. He said that, combined, private credit and government credit currently total some $60 trillion in the U.S., an all-time high, or about four times GDP. Private credit has fallen slightly, but only because of mortgage credit being written off through defaults. "This is not exactly the type of declining credit that is healthy and does not bode well for credit increasing in the future as these borrowers are locked out of the market."

Must Read: Analysts Weigh in After B/E Aerospace Begins Exploring Sale

His second point focused on housing market supports. He said that the housing market has been supported by a resurgence in second-lien borrowing, and that resurgence is now worryingly back at the same levels seen in the bubble years of 2005 and 2006.

The housing market, particularly existing home sales, has also been supported by a great volume of cash transactions. Over 50% of single-family homes in the last few years have been purchased by investor pools and other cash buyers. "This is not exactly indicative of the organic growth in the market from real buyers," he said.

While there has been a drop-off in cash transactions recently, they remain at very high levels and that has been correlated with a huge decline in the Bloomberg Housing Surprise Index since last summer. "We see that sales have sort of crashed in the last few months," said Gundlach. "When looking at it year over year, we seem to be on the cusp of something of a change happening here, with the existing home sales now negative."

With all the hype about the housing market, new home sales have been "remarkably" flat on their back like they were at the depths of the recession and falling anew once again. "Mortgage purchases, which is the real buying of houses, basically never gained any traction and are at the same levels that they were in 2010," he added.

Housing starts bumped up a bit, but are plateauing. Gundlach said starts are still residing below 1 million on an annualized basis.

Gundlach focused the next portion of his presentation on what he deems to be inaccurate comparisons on housing affordability. He notes that bullish housing market proponents have been referencing charts that they say show that affordability today remains well above affordability in the early 2000s and well above the levels of the housing boom and credit bubble. The inferences are based on the assumption that a 30-year amortizing, conventional type of mortgage is being applicable throughout, when they were in fact not commonly applied in 2005 and 2006, especially in 2006 when 70%-plus of all mortgages utilized in the more credit inflated places like California were exotic types of financing. "The problem with this chart is it doesn't really represent what's going on with the financing markets," he said.

1 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
XHB $33.46 0.00%
AAPL $94.98 -0.21%
FB $116.77 -0.56%
GOOG $692.36 0.00%
TSLA $230.00 -1.00%


Chart of I:DJI
DOW 17,750.91 -140.25 -0.78%
S&P 500 2,063.37 -18.06 -0.87%
NASDAQ 4,763.2240 -54.37 -1.13%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs