TheStreet.com's Jim Cramer says until the public feels they won't lose money on a home, no problems will get solved.Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.
I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.
The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.
Or it can try to change the psychology of the home buyer and homeowner.
Part of what made 1990 be a transition year to a better time rather than a disaster was growth. We were able to outgrow the excess inventory of commercial construction. In other words, we ultimately needed the buildings.
Right now, as I go over the comments the last few weeks from Centex (NYSE: CTX) (Cramer's Take) and Pulte (NYSE: PHM) (Cramer's Take) and Toll (NYSE: TOL) (Cramer's Take) and Ryland (NYSE: RYL) (Cramer's Take), it's pretty clear that they are still, after all of this, too long lots and too long options and too long homes. That's after they've cut the number of homes they are building in half.
That's why, unanimously, everyone knows housing will be bad next year. The supply is still growing faster than household formation, the main reason why people buy homes year after year. People are postponing that buying, good people who could get loans, because it simply isn't worth it. That's what they think.
The fact that the private mortgage insurers -- MGIC (NYSE: MTG) (Cramer's Take) and PMI (NYSE: PMI) (Cramer's Take) -- are going back down has to do with originations. They were doing the old "new money in to bail out old money lost" thing, but the decline in buyers is wrecking their earnings.
That would change if the psychology of loss would change. Even though housing prices dropped 20% in a couple of months this fall according to Centex, they are still too high because they are not moving.
The universal belief that a house is going to lose money underpins all that is wrong, but the Fed refuses to address it. The Fed doesn't want to. It just wants to tinker, Herbert Hoover-like, to fix the problem. The problem literally does go away the moment that the psychology changes.
Of course we are still too close to the peak build. How close? That's a tough one, as half the pundits say we are just finishing year one of the problem and others say we are in year two. I think we are in month 8 so I am obviously thinking pretty negatively. But even I think that in 2009 it might be right and I am planning accordingly personally.
But the Fed gets realistic that it is home prices, not three-month treasury prices, that is the culprit here, and only big cuts in interest rates to change psychology for banks, bank investors, and home owners and buyers, can really begin to stabilize the pricing that is the essence of the problem.
Random musings: Given that the close yesterday was nice and phony and the lift based on nothing, it looks like another day of suffering ahead.
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in stocks mentioned.
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Reader Comments (Page 1 of 1)
12-14-2007 @ 9:31AM
Gregg said...
Jimmy you are right again!
12-14-2007 @ 10:11AM
Jack Daniels said...
Once again krammer is looking for a govt bailout in the way of low interest for his friends on the street. Need to get back to the day when 20% down was required to purchase a home. This damn bailout of people who have little or no equity in the home is a slap in the face to the ones who actually put money down on their home. Access to easy money is what caused the housing mess. Time to man up krammer and LET THE MARKET TAKE CARE OF ITSELF. If companies need to go bankrupt in the process, so be it. I am in it for the long haul
12-14-2007 @ 10:25AM
budget said...
Mr: cramer you are 100% correct.
12-14-2007 @ 10:29AM
Paulo said...
Cramer is right!!!! Even people who put 80%
down and were never near sub- prime are having issues IF they for whatever reason NEED to sell a home- they cant.
This hampers job transfers, God forbid job loss, and so on --- legitimate reasons to need to move on.
Despite inflation or other issues, until we clear up the housing mess (price deflation) we will be sinking. Dropping interest rates is the answer for now---- not to create another bubble but short term to fix the mess. The Fed is either to loose or
to tight, lets get to a middle ground!!!
12-14-2007 @ 11:04AM
Charley said...
I doubt that an economic or financial fact could ever exist, in Mr. Cramer's world, that doesn't justify "a big cut in interest rates." I guess credibility doesn't count in the world of the stock operator.
Anyway, a fifth-grader not even capable of writing a personal check could figure out that interest rate cuts would do nothing to improve the psychology of the housing market. Like a lot of ballplayers, that market got "juiced up" big-time--on the financial steroids of outrageously low borrowing rates earlier this decade, which led to massive over-building and unsustainable hype. The realization that, in reality, homes are worth far less than advertised isn't going to go away by another injection of Mr. Cramer's drug of choice. The party's over.
12-14-2007 @ 11:14AM
bill said...
Recently, Dec 12 Cramer wrote article "the Crisis is Real Already" in the article he mentioned "that the bonds are signaling that many credit-market participants believe there could be a financial catastrophisne ahead" My musing is what are the bonds signaling and what kind of Catastrophe? A housing catastrophe or a banking catastophe? And isn't this a major cat already?
12-14-2007 @ 12:40PM
Tony said...
Come on Jim...the guys you insist "know nothing" are proving to know more than you...looks like this week's data is proving out the feds concern that inflation is an issue that needs to be dealt with (and the market seems to be in agreement). Why are you being so stubborn to admit that maybe, just maybe, the fed deserves a bit more credit (and respect!) than your ego will permit you to give them.
12-14-2007 @ 1:26PM
SKM said...
Mr. Greenspan and company caused this mess in the first place with the flooding of easy money for the market (1% Funds rate at the end) and now, Cramer, Wallstreet, bankers, mortgage lenders and others call again for the Fed to bail them out.
In the meantime, the dollar becomes almost worthless and the Europeans and Asians think that the dollar is nothing more than a joke but, Cramer and his group above don't seem to care.
12-14-2007 @ 2:11PM
Don Gonsalves said...
As usual Cramer believes the world revolves around Wall Street and the stock market. Wall street has become nothing more than a gambling casino with out the pretty girls. Nothing more.
House values are way out of line and overpriced and there is absolutely nothing the Fed can do to help. Why dosen't Cramer have any feelings for all the millions of people who overpaid for their houses and wil be paying this excess cost for the next 30 years. In the 1980/1990s the average accepted ratio of house price to earnings was 2.5. In many places in the USA this now stands at 5 or 6 which is impossible to continue. The average overall in the USA is about 3.4 which is not too bad compared to the past but 5 and 6 is assinine. Only time is going to solve the housing problem and that will happen when incomes catch up with house prices. Until then if you have to see your house you are out of luck and no one can do anything about it. IN the overpriced areas with ratios of 5/6 it is going to take about 10 years for salaries to catch up with home prices. THis happened before in the late 1980/early 1990 so don't say it can not happen
12-17-2007 @ 9:22PM
r rockwell said...
Don is right,you know when the median income in america is 50,000 plus or minus 8,000 across the us, who is buying 250,000 homes? duh, people that are going to lose their homes that's who.i'll give this financial advice for free! take your household income multiply it by 3, save 20% of that (downpayment) and thats what you can spend on a home....ooooh big secret revealed.
12-14-2007 @ 2:22PM
CJ said...
Cramer had it right regarding there being too many housing units created compared to the number of people. Then he says changing interest rates can change that. Nothing can change that, though, apart from tearing down housing units or bringing in more people.
The world functioned in the last nineties when housing units costed half what they do today. It will keep functioning just fine after we go back to those same prices (adjusted for inflation).
12-14-2007 @ 3:21PM
doylespar said...
strange but can you all recall 85cents per gallon for gasoline during the Clinton adminstration, lower heating oil prices and of course about 230 Billion in the budget for defense, cost of living increase were nil and interest rates were lower, the stock market was great and we won in Bosnia without any dead soldiers called "reserves" going to Foreign countries and the Federal budget balanced without loans from Communist China.And some debt was even paid off.
Of course your memories will need jogging about you having voted for the "family Values party" in year 2000 and 2004 the last election for president where a correction could have been made but naturally the swift boat campaign made the difference?
12-14-2007 @ 3:34PM
Jack F. Doyle said...
Inflation because of oil prices so high interest rates will help put more oil in our tanks?Meanwhile the jerk in DC keeps putting more in the ground against the day when things get tight?
Remember about 7 years ago when gasoline was 85 cents per gallon?Interest rates were low and we won in Bosnia without sending 300,000 soldiers overseas and we balanced the budget without stealing from the Social Security fund and borrowing from Communist China.?
Who appointed this family values bunch anyway,perhaps the folks who can't think straight?
Like many of you?
12-15-2007 @ 2:30PM
don ruby said...
The housing price bubble has started to leak. Homeowners who are trying to sell are finding no takers at their asking prices. Hard as it may sound, the national average price will probable decrease 20-30 % over the next 12-18 months. Banks and lenders will be left holding properties they cant unload except at bargain prices.