Jim Cramer of CNBC’s Mad Money has had a longstanding prediction that the housing market would bottom at the end of June. On Tuesday, two weeks prior to his original prediction, he was ready to declare the downturn is housing has reached the low point. He points to the much better than expected housing starts data that was released Tuesday morning; however as you can tell from our blog on that topic (Better Than Expected Housing Starts Number: Is That Green Shoot a Weed?), this headline number was misleading on the current situation in housing. Furthermore, we think it is irresponsible to make a macroeconomic pronouncement on the back of one month’s worth of data.
Cramer does not go as far as to say that viewers should invest in homebuilders, but he instead suggests that the way to play this “housing recovery” is to buy banks with substantial exposure to mortgage loans.
“What can you do with this housing bottom call? I think you can buy the banks, the banks with the most mortgage exposure. That’s Wells Fargo, that’s JP Morgan, and most important, Bank of America, both because of Bank of America and Countrywide. That’s the troika I have been buying for my charitable trust…” CNBC’s Mad Money 6/16/2009
Again, this seems to be a premature endorsement of these banks, after all foreclosures are continuing at record pace over the last few months. As anyone who has seen the chart of mortgage loans resets by type (first made by Credit Suisse (CS) and now reproduced around the web) knows that there is still a very difficult period ahead as many many billion of dollars of loans will be at risk. In the last few months we have been in a lull for the reset schedule, and even if some homeowners refinanced these loans already, it is logical to assume that there will be a large amount of resets on the way in 2010 and 2011. Certainly, some of these borrowers are making the minimum payments and will no doubt be underwater when the reset comes due. Interest rates, while still relatively low, have climbed back above historically extremely low levels. To ignore the upcoming reset schedule and the increased rates of foreclosures, even among prime borrowers is not wise.
At Ockham, we often try to keep tabs on what Cramer is talking about, and we know that often he is trying to be an entertainer first and anything else is secondary. However, this strikes us as particularly egregious and dangerous advice. The housing bubble was built up over many years and to think that the overhang in supply, foreclosure issues, and the upcoming reset schedule will be alleviated in just a few painful months is a hard pill to swallow. We have seen some data that suggests the housing market may be starting to stabilize but keep in mind that does not necessarily mean that the worst is behind us.