Bloomberg Writes: Gundlach Counting Rotting Homes Makes Subprime Bear
For Jeffrey Gundlach, the U.S. housing recovery isn’t so rosy.
The founder of $49 billion investment firm DoubleLine Capital LP is largely avoiding the subprime-mortgage bonds that jumped about 17 percent last year after home prices surged by the most since 2006, deterred by the lengthy process to sell foreclosed houses and the destruction that’s creating.
“These properties are rotting away,” Gundlach, 54, said last week on a conference call with investors, about homes stuck in foreclosure pipelines, adding that it could take six years to resolve defaulted loans made to the least creditworthy borrowers before the real-estate crash.
“The housing market is softer than people think,” Gundlach said, pointing to a slowdown in mortgage refinancing, the time it’s taking to liquidate defaulted loans and shares of homebuilders that have dropped 13 percent since reaching a high in May. D.R. Horton Inc., the largest builder by revenue, has tumbled 20 percent.
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A great read to understand why the housing market is in a Bear Market Bounce as opposed to any sort of a sustained recovery. Well, what used to be a bounce. In a gutsy call, I called for a real estate market top on October 3rd, 2013. You can read about it here I Am Calling For A Real Estate Top Here Further, I believe my call was right on the money and we should see negative year over year numbers once October of 2014 rolls around.
No doubt, just like the stock market, the real estate market is rolling over. While I have already talked about various stages of the bounce and what awaits us in the future, I haven’t really talked about what is driving this housing recovery. There are a couple of things.
1. Cash Buyers (aka. Investors, Hedge Funds, Financials): Nationwide that number stands at around 30%. This staggering number has one driver. Too much credit. In layman’s terms, the FED floods the market with cheap credit, financials/investors take this FREE money and invest/speculate in real estate or other mortgage backed instruments. Driving the recovery and housing prices higher.
“Blackstone Group LP and Colony Capital LLC have been central to the rebound, buying more than 366,200 properties in just a few cities”. — I mean seriously, come on!!! Good luck unloading those.
2. Backlog Inventory: Financials and banks, whether directly or through mortgage backed securities are sitting on a massive stockpile of properties even though the market has rebounded. How many? The article states 1.2 Million, but I fathom the number is a lot higher due to various off balance sheet and accounting tricks the banks are playing.
The bottom line is this. Don’t confuse this “dead cat bounce” with true economic recovery. The real estate market bounce has been driven by cheap credit and speculation. Nothing more. When the steam runs out, expect the housing market to decline below 2010 lows.
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Why Smart Hedge Funds Are Betting On Further Housing Collapse and Why You Should Do The Same