Cramer’s Call on Housing Will be off by at Least a Year (or two)
Loan Modification Help Center - Anyone that watches CNBC knows that Jim Cramer isn't afraid to express an opinion or make a market call. One of his recent prognostications was that the housing market bottomed on June 30th and that recovery, or at least stability, will reign from that date forward. While the forecast may have provided some relief for homeowners, commentary from industry watchers suggests that his market bottom call should have been made for June 30th 2010 or, quite possibly, 2011. Here are some of the reasons Cramer is likely to be wrong
1) Home prices ' Prices on homes are still over priced by at least 15%. While way off their highs, prices still have a ways to go before they get to fair value. Part of the problem is momentum. Prices are falling and, without something to put the brakes on, will keep falling. At this moment, the only thing that has changed for the market is that the driving force behind foreclosures and liquidity is the change from the devastation being led by subprimes to the devastation being led by unemployment.
2) Unemployment ' Unemployment is feeding foreclosures and vice versa. With the unemployment rate headed toward 10%, foreclosures are now being seen in the mortgage categories that include borrowers with (formerly) solid credit scores. Default rates on prime mortgages are now running at a higher clip than subprimes with jumbo prime mortgages seen as the next category to take the plunge. Even employed workers are seeing their wages decrease as indicated by the shrinkage in average work hours per week.
3) Foreclosures ' With foreclosure filings approaching 1.5 million for the first half of the year, current estimates are for a total of 3.5 million for the full year. The Center for Responsible Lending is calling for a total of 12 million foreclosures by the end of 2012. These are not the kind of stats that portend an increase in prices.
4) Unoccupied Homes, the Foreclosure Backlog, and Shadow Inventory ' Recent studies revealed that there are approximately 2.1 million unoccupied homes in the U.S. The foreclosure backlog, even with the restraint shown recently by lenders continues to grow. Additionally, there are hundreds of thousands of houses owned by speculators that are being kept off of the market in hopes that prices show some recovery. These are all homes waiting to come to market if prices tick up, which would mute any kind of sustained recovery.
5) Regression to the mean ' Bubble markets almost always come back to their historical mean price average and often overshoot it to the downside. There is no indication that real estate will be any different or that there are any factors that can stop price declines at the mean average.
6) Once burned... ' Foreclosed homeowners will be reluctant to purchase real estate again after the trauma they've just gone through. The same goes for the next generation of potential home buyers that no longer see home ownership as the fulfillment of the American dream. Many are calling for this echo baby boom generation to resurrect home prices based on its sheer size but there is little desire there to make the required sacrifices to purchase something that, in their adult life experience has caused so much pain.
7) Liquidity - Even for those with the desire to buy a home, the means to do it are not there. The reaction (some will call it over reaction) to the permissiveness of the real estate bubble has been the tightening of lending standards across the board. Yet to play out fully at the top end of the real estate market, banks are only allowing real estate purchases at three to four times household income versus the bubble standard of seven to eight times income. That means that a couple earning $200,000 per year will only qualify for a home in the range of $700,000 to $800,000 as opposed to the bubble standard of a $1.5 million home. Without incredible wage growth, the demand for high end housing could wither. Generally speaking, unless a buyer has an impeccable credit record, a 20% down payment, and a minimal debt to income ratio a mortgage approval isn't going to happen.
8) Aversion to credit ' Stung by over leveraging, consumers will act much like they did after depression; increasing their savings rates, moderating consumption, and avoiding heavy loads of debt. In that environment spending will slow dramatically, muting economic recovery for years.
In summation, the supply of housing and the demand for it will head in opposite directions until prices drop enough to become affordable for the millions of people currently suffering through the biggest economic contraction since the depression. In that light it's impossible to believe Jim Cramer's forecast that those conditions were reached less than three weeks ago.
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