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Why Housing Starts Have Peaked, Maybe Forever

NEW YORK (TheStreet) -- Earlier this week Jeffrey Gundlach, CEO and CIO of DoubleLine Capital gave his thesis on the bleak state of the housing market, and said he believes there will never be 1.5 million housing starts again, as long as he has a job.

Speaking at the Ira Sohn Investment Conference, 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 SPDR S&P Homebuilders ETF (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," Gundlach said during the presentation.

He noted that when combined, private 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." He also noted the recent uptick in the housing market has been supported by a resurgence in second-lien borrowing, and existing home sales have been supported by a large number of cash transactions, with 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.

Housing starts have plateaued as of late, and are still below 1 million on an annualized basis.

"If affordability was so great, why was the interest rate rise of last year so responsible for such a huge drop off in sales," Gundlachasked. "If you believe [the Fed relaxing its quantitative easing program] that was responsible for the rate rise and therefore rate rises are assuredly coming again, you're looking at a rather bleak picture of affordability." When rates crept up to 4.5% last summer, a $1,000 monthly payment with a 25% down payment could buy a $247,000 home. That's down from about a year ago, when the 3.25% mortgage rates could allow for the purchase of a $287,000 house. If rates shoot up to 6% as many believe they will, the value of the home that could be bought would be reduced to a third of recent levels without even factoring in the magnitude of price increases that occurred with the strong housing market of the last couple of years.

Gundlach isn't convinced that rates could increase to 6%, but he cautions that there will be a spike in rates if Fannie Mae and Freddie Mac, representing a huge fraction of the mortgages that are being created, were wound down by politicians and private money were brought back in. In such a scenario, mortgage rates would go up by 50 to 75, to 100 basis points. "That would certainly impact affordability in a negative way," he noted.

The famous investor rounded out his presentation by pointing out that home ownership rates will likely continue to sink because 70% of the population has been experiencing "substantially" declining wages and income. "It's hard to believe that there can be home ownership of 60%, 65%, to 70% with this kind of statistic ... I'm going to make the bold statement that for the rest of my career we will never see a year of 1.5 million housing starts again."

Here are the slides for Gundlach's presentation.

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