Homeownership in America is headed down and investors should short homebuilder stocks, according to one of the most influential fund managers in finance.
Speaking to the Irah Sohn Investment Conference, Jeff Gundlach, manager of the $49 billion DoubleLine, the U.S. will never see the days of 1.5 million annual housing starts ever again. Just a decade ago, housing starts were about 2 million per year. Today, it's less than half of that.
High student debt and bad memories of the housing crisis have soured a generation of potential new homebuyers. "The kids aren't alright," Gundlach told the conference.
"I'm really surprised at how people are so copasetic about the homebuilders and the housing market," said Gundlach to CNBC's Scott Wapner at the Sohn Conference. "You look at the data and it's gotten really soft…. You look at mortgage applications, housing starts, [and] you look at new home sales in particular. They're no better than they were at the so-called trough of the recession."
Gundlach is short the SPDR S&P Homebuilders ETF (XHB). But, the technicals may not agree with Gundlach, at least when it comes to the XHB.
"We actually think that the charts are starting to look pretty good right here," said Steven Pytlar, chief equity strategist at Prime Executions. "They're sitting right on an important support level that they've tested three times over the past several months since December. We would think that buyers would be interested in coming back into the XBH."
So what gives? Why would the XHB look like a potential buy from the technicals? It may have a lot to do with the fact that the XHB isn't entirely homebuilders. Its biggest holding (3.4 percent) is wood products company Trex. In fact, the XHB's top four holdings appliance, furnishings, and building products companies. Only 27 percent of the ETF are homebuilders.
"You have to also remember that the XHB is also composed of a lot of basically home retailers," Pytlar said. "A more cleaner look at construction and housing would be ITB [the iShares Home Builder ETF]. But, the XHB could be getting a bit of a tailwind at these levels. We would look to actually be buying it here."
Gina Sanchez, founder of Chantico Global, thinks that Gundlach is right about his long-term negative outlook on housing but is wrong about the XHB precisely because of the ETF's makeup.
"If homeownership is down, that means that rentals are up," said Sanchez, a CNBC contributor. "And, when rentals are up, people will stop building but they'll start accessorizing. Accessorizing will actually help the XHB…. As people are renting more than they're buying, they are going to accessorize with Bed Bath and Beyond and those kinds of companies. So, I don't think that this is a clear story that a dampening housing market is going to result in a dampening XHB."
To see the full discussion on housing and the XHB, with Pytlar on the technicals and Sanchez on the fundamentals, watch the above video.