Billionaire investor Jeffrey Gundlach recently rang the alarm over a number of growing economic concerns, including a potential housing market crash. Indeed, the DoubleLine Capital CEO predicts a major reversal is headed for home prices, stocks and even the wider economy.
What do you need to know about Gundlach’s startling prediction?
Well, in a recent company webcast, Gundlach expressed concerns over the state of the housing market. He believes that elevated mortgage rates have pushed buyers out of the market. All the while, current home owners enjoying pandemic-level, near-zero mortgage rates are reluctant to sell. This dynamic has resulted in a housing market that has made little progress in the past year.
Interestingly, while many economists believe lower mortgage rates may bring back demand — and in turn raise prices — Gundlach thinks otherwise.
“I believe that if mortgage rates fall further by, say, a percentage point, I think we’ll actually start to see home prices weaken because we’ll unlock supply,” Gundlach said. “Ironically we might have housing prices deteriorate along with falling mortgage interest rates — the opposite of what most of our 40-year experiences have been.”
What Does Gundlach’s Prediction Mean for the Housing Market?
Gundlach clearly has confidence that the major disrupting force in housing is the limited supply of homes for sale. Thus, as mortgage rates ease, the rise in inventory experienced as sellers reenter the market, a downward pricing force, will notably outweigh the new influx of buyers, an upward force.
As mentioned, this is quite contrary to most economists’ opinions on the relationship between mortgage rates and home prices. Indeed, typically, as mortgage rates fall, demand for homes rises. That can then bring prices up in the process.
Gundlach also offered some predictions about the long-reaching implications of the regional banking disaster this past spring. According to Gundlach, the incident has pushed people out of bank deposits and redirected them to money-market funds. He believes that this may affect the widespread balance of risk.
“I think it really misses the point to think people are going to go from a money-market fund, a six-month T-bill-and-chill type of a situation, and go into the Ark type of fund or the Magnificent Seven type of fund,” Gundlach said. “That’s such a monumental change in risk appetite that I don’t think it’s logical.”
Gundlach also shared gloomy predictions for the wider economy. He estimates that interest payments could grow into as much as 20% of federal tax revenue over the next five years as the country runs up debt in the wake of a potential recession.
Indeed, Gundlach sees a potentially lengthy recession in store of the the U.S., citing inverted yield curves as well recent economic indicators from the Philadelphia Federal Reserve.
“This is completely consistent with the potential for recession say in the second quarter or so of next year,” Gundlach noted.
On the date of publication, Shrey Dua did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
