Miller: Gundlach's bearish housing position is wrong

May 16, 2014 @ 9:19 am

Legg Mason Inc.'s Bill Miller said investor Jeffrey Gundlach and real estate billionaire Sam Zell are wrong about housing.

Mr. Gundlach, the chief executive officer of DoubleLine Capital LP, and Mr. Zell, chairman of landlord Equity Residential, predict fewer young people will buy homes, further driving dodwn the U.S. ownership rate. Mr. Miller, the stock picker who beat the S&P 500 for a record 15 years, said he's so confident that lending and housing will rebound that he's betting on mortgage insurers, homebuilders and subprime servicers.

“Anytime there's a cataclysm, people always say it's never going to come back,” said Mr. Miller, 64. “I don't believe there's been a secular change in demand for housing. People may just rent longer than they otherwise would have before eventually buying.”

Mr. Miller, portfolio manager since 1999 of the $2.1 billion Legg Mason Opportunity Trust at LMM, is bullish on housing even as Federal Reserve Chairman Janet Yellen raises concerns about the economic impact of slowing sales. U.S. mortgage lending contracted to the lowest level in 17 years in the first quarter, and sales of lower-priced existing homes plunged 12% in March compared with the year-earlier period.

Since 2011, when homebuilder executives started talking about their improved outlooks, Mr. Miller has been adding to his real estate and financial holdings, which now make up 33% of the fund. Legg Mason Opportunity Trust, which Mr. Miller has co-managed with Samantha McLemore since 2008, returned 23% over the past 12 months, ahead of 97% of similarly managed funds, according to data compiled by Bloomberg.

Mr. Miller, who can recall how the stock market performed on many days as far back as the 1980s, said he remains upbeat on housing because banks are beginning to ease lending requirements.

In March, credit standards were the loosest in at least two years, according to a Mortgage Bankers Association index. The measure, based on underwriting guidelines, rose to 114 from 100, its starting point in 2012. Wells Fargo & Co., the largest U.S. home lender, last month cut its minimum credit score for borrowers of Fannie Mae and Freddie Mac-backed loans to 620 from 660. And earlier this week, the Federal Housing Finance Agency, which oversees the two government-backed mortgage companies, unveiled plans to spur lending by reducing the risk to banks of having to buy back loans that default.


“The housing recovery is far less robust right now than it's ever been historically coming out of a recession,” which means there's so much room for improvement, Mr. Miller said. “That's the opportunity and also what gives rise to the confusion” among investors, he said.

A Commerce Department report to be released Friday may show that housing starts increased to an annualized rate of 980,000 in April from 946,000 in March, according to economists surveyed by Bloomberg News.

Earlier this month at the Sohn Investment Conference in New York, Mr. Gundlach recommended betting against an exchange-traded fund that tracks an index of homebuilders because declining affordability will reduce housing demand. Mr. Gundlach wrote in an e-mail that he doesn't expect a significant increase in housing starts.

Mr. Gundlach's $32.7 billion DoubleLine Total Return Bond Fund, which invests in mortgage-backed securities, returned 1.8% over the past year, ahead of 83% of rivals.

“You have a huge fraction of 18- to 34-year-olds who are unemployed and they also are much less interested in homebuying,” Mr. Gundlach said May 6. “Most of these people have been scarred by the housing collapse.”

The share of Americans who own their homes was 64.8% in the first quarter, the lowest since 1995, according to a Census Bureau report last month. That's down from 65.2% in the previous three months and 69.2% at its peak in 2004.

(Bloomberg News)


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