• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Bruce Kamich
    • Doug Kass
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • TheStreet Smarts
  1. Home
  2. / Investing
  3. / Real Estate

Not Movin' Out

Young people are currently reluctant or unable to own their own homes.
By TIM MELVIN May 06, 2014 | 04:00 PM EDT
Stocks quotes in this article: LEN, TOL, PHM

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.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Melvin had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Real Estate

More from Real Estate

2 Hot Trade Ideas as We Start the Dog Days of August

Bret Jensen
Aug 1, 2022 12:30 PM EDT

I remain cautious, but that hardly means I'm sitting on my hands.

When Did We Stop Worrying About the Wealth Effect?

Peter Tchir
Jul 5, 2022 1:00 PM EDT

This looks like a market pricing in a recession/policy mistake.

Kass: Untapped Homeowners Equity and Imbedded Gains Will Be a Ballast to Growth

Doug Kass
Jun 29, 2022 3:00 PM EDT

Homeowners equity has more than tripled in the last decade.

Global REIT American Tower Is Poised for a Rally

Bruce Kamich
Jun 21, 2022 10:13 AM EDT

Here's what traders could do.

Dozens of Stocks Suspended in Hong Kong Due to Problems in Accounts

Alex Frew McMillan
Apr 1, 2022 9:00 AM EDT

After missing yesterday's deadline day for filing full-year 2021 figures, many Hong Kong-listed, China-focused companies saw their shares stop trade.

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 02:23 PM EDT STEPHEN GUILFOYLE

    We're Cleaning Out This Retailer From the Bullpen

    Check out the latest moves in TheStreet's Stocks U...
  • 10:24 AM EDT JAMES "REV SHARK" DEPORRE

    This Weekend on Real Money

    To Improve Your Trading and Investing, Spend More ...
  • 08:44 AM EDT PETER TCHIR

    CPI Beats Expectations, But Maybe Not the 'Whisper'?

    Slightly better-than-expected inflation across the...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2022 TheStreet, Inc., 225 Liberty Street, 27th Floor, New York, NY 10281

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login