At the Ira Sohn Investment Conference in New York on Monday, Jeffrey Gundlach of Doubleline Capital expressed some very negative views on the single family housing market. He pointed out the dearth of first-time home buyers as younger Americans are reluctant and often unable to take on the responsibility of a home. The numbers being released right now as existing home sales are at a 20-month low.
Gundlach notes that for many Americans, renting has become a more financially sound decision than buying a home. "Single-family housing is overrated," he said, citing younger people living with their parents. "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." He summed up by saying the kids are not, in fact, all right. He thinks that housing will not rebound and will go to new lows.
I read the conference summaries all over the Web yesterday and filed the information away for future consideration. I had to leave to take my son to drop his car off at the shop. On the way back, he made an interesting comment: "You know, in a couple of years when I am ready to buy a house, I will be able to get one cheap as heck." He pointed out that the five-mile drive to the auto shop, we had passed no less than 10 new housing developments in various stages of construction. His thesis was simple and closely resembled Jeffery Gundlach. He speculated that even if the builders could find folks who wanted to buy their new homes, there was no one to buy their existing homes and allow them to move up.
I think they are correct. The builders seem to have bought the housing recovery story and are buying land and building with great abandon. The problem with this strategy is that I simply do not buy the story. I think the cash and investment buying has grossly distorted the numbers and inflated prices quite a bit. I also think that potential first-time or mid-market buyers have seen their credit scores decline in the past five years as a result of the economy. The pool of qualified buyers is shrinking even as builders are slapping homes up as fast as possible.
When I was bullish on builders back in late 2011, there was still a bit of fear around the housing market and they were trading below book value. Today, it seems that everyone is enthusiastic about housing and the building stocks. Lennar (LEN) trades at 1.86x book value, Toll Brothers (TOL) fetches 1.7x and Pulte Homes (PHM) is at 1.57x. This is the level the builders were trading at back during the boom year of 2005-06, so I have a hard time justifying it based on current the current economic conditions and demographic trends.
Gundlach thinks that the housing market will see new lows. That would require a huge drop from current levels, so I am not terribly sure I agree with that. But even if the bottom for housing prices is in, we are going to bump along that bottom for a long time and homebuilders will struggle to make money.
If you own these stocks, take your profits. If you do not own them, do not buy them now. If you are a trader, they should be on the top of your list of short setups. If you are a risk-adverse value guy like me who likes to take a small wager now and again, then it is probably time to look for chicken shorts using put spreads in the leading homebuilders.
