Jeffrey Gundlach, the founder of Doubleline Capital and the man dubbed the "King of Bonds" by Barron's, , is not a man to mince words. And he certainly didn’t during his presentation at the Altegris Strategic Investment Conferece (SIC) 2014.
The majority of Gundlach’s speech, entitled “Charles, Mother Has Come to Stay,” focused on the housing market, specifically residential housing. Where the consensus is that a lack of new home buyers in recent years is likely creating pent-up demand, Gundlach says “not so fast.”
What Gundlach sees as being the fundamental issue with this assertion is that this most-recent generation, the millennials, may not be in any rush to buy their first home. The long tradition of home ownership in America may be shifting fundamentally.
He said, “We all know that something funny happened after the financial crisis, and that is that housing market sales started to move towards cash transactions, big investment pools, and speculators buying vacation homes starting to dominate the market.”
But if the anticipated reversal of this trend that should follow this period of deleveraging, it’s certainly got a funny way of showing it. Gundlach observes that the trend will only reverse itself if one assumes that the old normal will be the new normal. And he doesn’t see this as being the case.
He continued: “Existing home sales have increased a little bit versus how low they were in 2010,” he told the SIC crowd on Wednesday. “But you’ll notice, in the past six or eight months they’re falling fairly rapidly. It kind of looks like 2007, actually. … Compare the 2008-9 period to today, you’ll see that existing home sales are exactly where they were at the depths of the recession, and that’s with all the money coming in from investment pools. … As we look at year-over-year data of existing home sales, it’s rather stark, isn’t it? Last summer, once the rate rise hit, existing home sales collapsed and it’s negative year-over-year.”
“When you look at new home sales, whose investment pools are not that factored into the mix, you can see a totally different picture,” he continued. “New home sales, like existing home sales, are falling. They’re now back at the levels seen in 2012, which is very little different from the absolute depths of the recession in 2009-10. So the new home sales: not very encouraging.”
So what’s driving this? Gundlach suggests that it’s part of a broader cultural shift away from home ownership. Citing data about the millennial generation, the percentage of adults living at home, increasing multi-generational households, and decreasing income levels, Gundlach builds a case that the expectation that home ownership is simply going to spring back to its previous levels is misguided.
“I believe that the most important cornerstone, the home base of investing for the next 10 years, in the developed world in particular, is the awareness of how radically demographics are changing, how substantially workforces are aging,” Gundlach said.
What’s this mean? It might mean that much of what we’ve come to understand about economic trends is becoming obsolete, a picture of a world that doesn’t exist anymore and that our current situation is moving away from rapidly.
“…first time home buyers are non-existent over the last few years, trending much lower,” he continued. “And the bulls say, ‘well, this is great news because it represents huge pent-up demand.’ Maybe they’re right, but there’s an old saying in the investment business: ‘The trend is your friend.’ And until I see this [trend] reverse in some sort of way, or at least stop declining, I’m going to discount the pent-up demand argument. I think the reasons behind [this decline] are demographic and systematic. … Household formation is incredibly depressed. This is not simply because of economic necessity, though that plays a part, it’s also because of preferences. Millennials are not the same as boomers.”
In the end, a country where 70 percent of people own homes may simply be a thing of the past. Millennials may prove more interested in living in tiny down-town apartments in cities or living in their parents’ houses, both because of their culture and because of their economic situation.
So if you’re certain that the current state of affairs in residential housing is about to bounce back to pre-recession levels, Jeffrey Gundlach is pretty sure you’re wrong.
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