Gundlach: The Bad News for Housing

May 20, 2014

by Robert Huebscher

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Residential housing is in trouble, according to Jeffrey Gundlach. It’s not heading for a repeat of the 2008 collapse, but it’s equally unlikely that housing growth will provide the needed push for a strong U.S. economic recovery.

“For all those people who are looking for a bump from housing,” Gundlach said, “I don’t think you’re going to get it.”

Gundlach spoke May 14 in San Diego at the Strategic Investment Conference, sponsored by John Mauldin and Altegris Investments. He is the founder and chief investment officer of Los Angeles-based DoubleLine Capital.

A copy of Gundlach’s presentation is available here.

Too few buyers are chasing too many homes at today’s price level, according to Gundlach. Housing is like any other commodity ? its prices are governed by supply and demand. For residential home buyers, better times await.

I’ll review Gundlach’s assessment of the housing market and his predictions for the bond market.

Macro headwinds

At a macro level, Gundlach doesn’t expect sufficient credit growth to support a surge in home sales. He said deleveraging in the U.S. economy is a “myth.” Although private credit debt has fallen since the financial crisis, its decline has been more than offset by the growth in public-sector debt. The combination of private- and public-sector debt is now $63 trillion, which Gundlach said is a new high.

“It’s very unlikely, in my opinion, you’re going to see a sort of burst forward in borrowing that’s going to propel housing higher,” he said.

Consumers are still too highly levered, he said. Mortgage debt has declined, he said, but only because of write-downs due to defaults.

“That does not exactly set a great platform for future enthusiasm on housing,” he said. “These people have destroyed their credit, and they’re not likely to be able to run back into the housing market anytime soon.”

Second-lien mortgages have risen over the last several years, he said, to levels that resemble the pre-crisis era. According to Gundlach, that’s because household saving is limited and income growth (at least at the median-household level) has been non-existent.

Since the crisis, cash transactions have represented a larger share the residential market. They are up 50% since 2011. Gundlach said those were transactions by investment pools and by speculators in vacation homes, and they were responsible for a large proportion of housing price gains.

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