Is Housing Really a Short Again?

May 6, 2014 by Jon C. Ogg

home buildingIt does not take a rocket scientist to figure out that months of weak housing data are signaling real underlying problems in the single-family home market. Sure, certain markets remain hot and with prices well above the pre-recession levels, but the housing market is simply slowing down. You can blame mortgage qualification criteria in part, as well as the partial wind down of quantitative easing. You can blame a slightly higher interest rate environment, and you can blame home prices in general — the sticker shock.

What we wanted to ask is if the single-family housing market is truly a short. This notion became more prevalent on Monday after Jeffrey Gundlach of Doubleline Capital said that single-family housing was a short.

Gundlach is a bond fund manager who also makes equity views, and some investors may wonder why he thinks he is expert on housing. The reason is that Gundlach’s background is intertwined in mortgage-backed securities (MBS) in bond funds, and MBS fund managers have to pay close attention to housing trends from the demand side and the supply side when it comes to evaluating mortgage risks.

What really stood out is that Gundlach even opined that the United States will not see a million housing starts again for the rest of his career.

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Take into consideration what it means now that the Federal Reserve is not buying up all the conforming mortgage-backed securities pools.

SPDR S&P Homebuilders ETF (NYSEMKT: XHB) was the target of the short call, but this includes a broad sector of companies that also sell home goods rather than just the homes themselves. This exchange traded funds fell on Monday, and it was down another 1.3% at $30.92 Tuesday morning, against a 52-week range of $27.73 to $34.27.

iShares U.S. Home Construction (NYSEMKT: ITB) is made up mostly of the large home-building stocks, and this would actually be a better target if you trust that Gundlach’s view is likely to be gospel. The ITB ETF is down another 1.3% at $23.33, against a 52-week range of $20.18 to $26.56.

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