Housing still a weak investment, bond fund manager says

FORTUNE — Your house is a terrible investment, and it’s getting worse. Of course, that’s good news for home shoppers. Prices are likely to fall from here.

That was the view of one of the world’s top bond managers at one of Wall Street’s most high profile investment conferences on Monday. Speaking at the Sohn Conference, which is being co-produced by Bloomberg, Jeffrey Gundlach, who is the founder of bond fund firm Doubleline Capital, called single family houses “overrated” and over-loved by individual investors.

“Home ownership will continue to decline,” says Gundlach.

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The housing market, after rebounding for the past year or so, has stalled lately. Like much else in the economy, many have blamed the weather, saying it’s just a pause. Gundlach disagrees. He thinks home sales, which are reported with a lag, will continue to disappoint, and, as a result, prices are likely to fall.

That’s a problem. Despite the improvement, the housing market has continued to be a drag on the overall economy, subtracting as much as a percentage point off GDP growth. Lower home prices could increase foreclosures, which have been falling recently, but remain elevated.

Gundlach says the pent up demand for housing that bulls talk about won’t materialize. Homeownership rates have fallen in the past few years, and people assume those numbers will go back to where they were before the housing bust. But Gundlach says the current level of homeownership is normal. It was elevated in the mid-2000s.

Second, Gundlach argues that first-time buyers are not likely to come back in droves. “The kids are not alright,” says Gundlach.

More young people are staying with their families, or renting. What’s more, rising rents, Gundlach says, will make it harder for renters to save money for a down payment.

The rising affordability that housing bulls often say will boost sales is actually an illusion, Gundlach claims. Many of the adjustable-rate home loans that were available in the run up to the housing bust are no longer an option for most borrowers. So even though interest rates have fallen, Gundlach says, the monthly payment that the average borrower has to pay has gone up, by nearly 25% from 2006. And Gundlach claims that the efforts to replace mortgage insurance giants Fannie Mae and Freddie Mac could make home loans even more expensive.

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What’s more, Gundlach says the supply of houses on the market could soon spike. He says as many as 35% of all subprime borrowers are still behind on their mortgages. Banks, under pressure from regulators, have slowed putting those houses into foreclosure. But he says many of those houses could eventually hit the market.

Institutional investors who have bought up houses in the past few years may look to cash out in the next few years. That should put more houses on the market and push down prices as well. Add the fact that cash-poor, house-rich baby boomers who are increasingly going to need to sell and Gundlach sees a recipe for still lower housing prices for years to come.

Of course, that’s great news for future home buyers, as long as they don’t think of their house as a good investment. There’s a good argument it won’t be.


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