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Jeffrey Gundlach’s Short Call on Homebuilders Is Dead On

The bear case for homebuilders is solid, but most investors would be better off avoiding homebuilders rather than shorting


The King of Bonds is shorting homebuilders … and based on recent performance and poor demographics, it looks like he’s onto something.

homebuilders housing market jeffrey gundlachJeffrey Gundlach, founder of DoubleLine Capital, is best-known for his ability to generate alpha by managing bond funds, but he has a pretty good track record making calls in equities, too. That’s why anyone holding homebuilders should think about his latest short.

Speaking at the Ira Sohn Investment Conference in New York — where hedge funders reveal their favorite trades — Gundlach made the case for going short on the homebuilders.

True, there’s been a great deal of pain this year. After rallying hard in 2012 in anticipation of a better housing market, homebuilders as a group badly lagged the broader market last year and have been mostly struggling ever since.

Gundlach has a short position in the SPDR S&P Homebuilders ETF (XHB), which is off 7% for the year-to-date. Some individual names are faring even worse. Lennar (LEN) is one of the better homebuilder stocks, and it’s off by 2% in 2014.

Others aren’t nearly as lucky.

Weakness Abounds Among the Homebuilders

Trex (TREX), which works primarily in home decking and railing, is a major holding of the XHB ETF, and at -11% year-to-date, it’s weighing heavily on the fund. Homebuilder MDC Holdings (MDC), down 13% YTD, is likewise struggling. Even Home Depot (HD), an indirect bet on the housing market, is in the red by 5% in 2014.

Partly this is a hangover from the huge gains that homebuilders enjoyed the last few years on the anticipated recovery in housing. But there are other forces at work, including rising home prices and mortgage rates.

Jeffrey Gundlach is short XHB because the housing market and homebuilders have gotten weak, and the market isn’t waking up to the fact. As Gundlach told CNBC:

“I’m really kind of surprised by how copacetic people are about the homebuilders and housing markets. If you look at the data, in recent months it’s gotten really soft.”

More ominously, you can build a bearish case on homebuilders on a shift in attitudes among the U.S.’s newest cohort of would-be home buyers. The millennials — that group of people born from the 1980s to the early 21st century — aren’t buying homes. Worse still is that given their dire financials, millennials simply won’t be able to buy a house anytime soon even if they want to. (And many don’t.)

Only 12% of millennials own a home, according to the U.S. Census Bureau, vs. 25% of baby boomers back in 1970. Heck, even 19% of Generation X owned a home in 1990.

Slammed by high unemployment and student debt, millennials are in no rush to get married or move out of Mom and Dad’s basement. Indeed, 38% of millennials are living with their parents. That could be a drag on housing for years.

Although that’s not sufficient reason to short homebuilders — shorting a stock being a very risky business — it does make the case for homebuilder stocks being overpriced.

Bottom Line

If you’re still betting on anything from TREX to LEN to XHB, it might be time to jettison it from your portfolio.

A soft market and uncertainty over future demand makes these names a hold at best.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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