Bill Miller said investor Jeffrey Gundlach and real estate billionaire Sam Zell are wrong about housing.
Gundlach, the chief executive officer of DoubleLine Capital LP, and Zell, chairman of landlord Equity Residential, predict fewer young people will buy homes, further driving down the U.S. ownership rate. Miller, the stock picker who beat the Standard & Poor’s 500 Index for a record 15 years, said he’s so confident 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 Miller, 64, sitting outdoors at a table overlooking Baltimore’s harbor. “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.”
Miller, portfolio manager since 1999 of the $2.1 billion Legg Mason Opportunity Trust at LMM LLC, is bullish on housing even as Federal Reserve Chair 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 percent in March compared with a year earlier.
Since 2011, when homebuilder executives started talking about their improved outlooks, Miller has been adding to his real estate and financial holdings, which now make up 33 percent of the fund. Legg Mason Opportunity Trust, which Miller has co- managed with Samantha McLemore since 2008, returned 23 percent over the past 12 months, ahead of 97 percent of similarly managed funds, according to data compiled by Bloomberg.
Easing Credit
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 when it started 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.
Gundlach’s Pessimism
“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, said Miller. “That’s the opportunity and also what gives rise to the confusion” among investors, he said.