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Why the golden age of housing is over

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DoubleLine Capital CEO Jeffrey Gundlach shares Fed Chairwoman Janet Yellen’s concerns on housing and is betting appropriately.

“Readings on housing activity, a sector that has been recovering since 2011, have remained disappointing so far this year and will bear watching,” Yellen said in testimony on Wednesday.

Gundlach, who spoke at the Irah Sohn Investment Conference in New York earlier this week and with CNBC/Yahoo Finance late Tuesday, doesn’t understand the bullish views of some investors.

“I’m really surprised at how people are so copacetic about the homebuilders and the housing market,” he said. “You look at the data, and it’s gotten really soft… You look at mortgage applications, housing starts, [and] you look at new home sales in particular. They’re no better than they were at the so-called trough of the recession.”

The bond guru believes the U.S. is will never again see a year with 1.5 million housing starts, Yahoo Finance reported. In March, private housing starts were at a seasonally adjusted annual rate of 946,000; a decade ago they were at 2 million.

Gundlach points to demographic shifts as the main factor behind this weakness.

“Single-family housing is overrated,” Gundlach told Bloomberg earlier this week. “Renting is more appealing across all age groups, all parts of the U.S., city, suburb, small town and rural. This is a generational preference; all young people are scarred by the housing crash,” and they don’t think current interest rates are low.

At the Ira Sohn event, he pointed to high student debt and painful memories of the housing crisis as reasons for pessimism among potential new homebuyers. “The kids aren’t all right,” Gundlach told the audience.

Housing, real estate plays

Gundlach says he’s shorting the SPDR S&P Homebuilders ETF (XHB). That ETF is down more than 7 percent so far in 2014. XHB includes holdings in wood-products maker Trex, as well as companies that produce appliances, furnishings and building products.

The iShares SPDR S&P Homebuilders ETF (ITB) is down about 6 percent.

But there are plenty of housing-related holdings that are having a good year.

The iShares FTSE NAREIT Residential Plus Capped Index Fund (REZ) has soared 17 percent. The Vanguard REIT ETF (VNQ) is up 14 percent, and the Market Vectors Mortgage REIT ETF (MORT) has jumped 10 percent through Wednesday.

REZ has large stakes in companies like Public Storage (PSA), Health Care REIT (HCN) and Essex Propeerty Trust (ESS). VNQ also holds Public Storage and Health Care REIT, along with ProLogis (PLD) and Simon Property Group (SPG).

As of Tuesday, the FTSE NAREIT All-Equity REIT Index has produced total returns of nearly 12.5 percent in 2014. The residential sector component of the index is posting total returns of 18.25 percent, while the manufactured-home sector has total returns of 15.96 percent. Mortgage REITs have total returns of about 12.70 percent, according to NAREIT data.

In other words, Gundlach may be betting on a longer-term trend, via a housing play that is not jibing with some of its counterparts.

Still, both Yellen and Gundlach have some data to back up their concerns. Building permits fell 2.4 percent in March, and existing home sales were largely unchanged.

“The recent flattening out in housing activity could prove more protracted than currently expected rather than resuming its earlier pace of recovery,” Yellen said on Wednesday.

(DoubleLine recently reported inflows of $320 million into its total return bond product for April and overall inflows across its product line of $442.5 million; it says it has some $50 billion in assets under management.)   


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