Great Cramer Summary on Housing

September 15, 2008

Jim Cramer has been converting from bear to bull on housing overall, and he wrote his best analysis yet in New York Magazine. Here are some highlights of his 10 reasons that he thinks housing will bottom in about 9 months:

The converted bears, as well as the panicked sellers desperate to bail out and nervous buyers afraid to jump in, will be dead wrong nine months from now, when housing prices bottom. In fact, I’ll call the precise date of the housing-market turnaround. It will begin on June 30, 2009.

Let me give you ten reasons why everyone who now thinks there’s no end in sight to weakening home prices will look like a fool in nine months and will miss the best opportunity to buy since the 1989–1991 real-estate crash.

1. Two years ago, we were building twice as many homes as in 2008, and the decline in new-home building is now accelerating. At this pace, we could see new-home construction fall an additional 25 percent, back to levels last seen when we had 60 million fewer people living in this country. By next June we won’t be building enough homes to accommodate demand, and the gap between supply and demand won’t be made up by unsold inventory..

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6. Come June, the bulk of the reckless 2-and-28 loans—the ones with the low teaser rates for the first two years that sucked people in and then reset at much higher rates, dragging people under—will have moved through the system. These loans have been the biggest source of foreclosed property, so the rate of foreclosures should decline sharply once those loans are off the books, tightening supply and soothing anxious buyers’ nerves.

This one, on household formation, is one of my favorites:

7. We may not think of ourselves this way, but we are still a growing nation: Four million babies are born each year in this country, vastly exceeding the nation’s death rate. Household formation, meanwhile, has held steady at about 800,000 a year. Families have been camped in their apartments or crowding in with their in-laws for some time now. That pent-up demand is bound to find expression and put upward pressure on prices, as credit again becomes easier to get.

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Household Formation

August 29, 2008

One of Jim Cramer’s comments caught my eye:

There’s a tremendous amount of household formation, 800,000 every year, Cramer said. Four million babies born each year, divorces, 2.5 million new citizens…

One of the most fundamentals drivers of demand for housing is household formation. When you go from 200 million Americans to 300 million Americans, it creates a lot of new households, each of which has to live somewhere.

In tough economic times, people tend to put off forming households. They live longer at home with parents, or put off marriage. Blanche Evans writes:

Between the birth rate and immigration, legal and illegal, the U.S. should be adding about 1.2 to 1.5 million households annually. In 2007, we added half that number. What does household growth mean to housing?

Household growth is a good indicator of the economy. When money’s tight, people tend to double up. More grown children fail to launch and stay put in their parents’ basements, more renters sign new leases, fewer first-time homebuyers come to the table, which stifles move-up buyers, and the final result is that homebuying stagnates.

The National Association of Realtors argues that there’s a lot of pent-up demand on the sideline:

Since 2005, household formation has jumped back above the historic norm to 1.38 million units per year, with 1.63 of them coming in 2007. However, sales levels have fallen to their lowest levels in nearly 10 years. This recent trend suggests two things. First, a reserve of pent-up demand is being built up. Second, there is some factor precluding these would-be buyers from entering the market. With the economy slowing, employment and income fears may be weighing on potential buyers. Financing has improved at the lower price-range of the market, but jumbo rates are artificially high, and lending standards have tightened. Uncertainty over both issues as well as the foreclosure situation has likely created much consternation. Regardless of the reason, would-be buyers are sitting on the side-lines, but the steady march of an expanding demand base will not allow them to rest there for long. This pent-up demand will begin to strain the relatively tight rental market, forcing up rents until households opt to reconsider their confidence, reevaluate their affordability, and decide to jump back into the market.

Here’s another perspective, from January:

The always-thoughtful Tony Crescenzi of Miller Tabak, in a note this morning, says that the slide in new home inventory “is still more than 1.5 million above normal, but improvements are occurring. The inventory figure is foremost in terms of what is next for prices.”

He further points out: “The amount of new dwellings needed each year is roughly 1.1 million or 1.2 million because of increases in household formation related to population growth. This means that the amount of new construction is running about 400k to 500k below the level of household formation, an amount that will take a significant bite out of the level of excess inventory.


Cramer: Housing Recovery in Next 12 Months

August 27, 2008

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A bullish prediction by Jim Cramer this morning focused on the following strengths:

We’re building fewer homes, so inventories have the chance to come down.

The recent housing-rescue bill authorized the Federal Housing Authority to put $300 billion toward getting homeowners out of difficult floating rate loans to the low fixed-rate kind.

Prices have come down enough to lure out the bargain shoppers, about an average of 7% year-over-year. Today’s S&P housing numbers showed declines of over 25% in some areas. That trend could continue.

At last the holdout markets have rolled over – think New York. When that happens, a recovery can happen.

If – and Cramer thinks this is a when – Fannie Mae [FNM 6.27 0.65 (+11.57%) ] and Freddie Mac [FRE 4.55 0.58 (+14.61%) ] are taken over by the government, mortgage rates will come down. They’ve been going up month to month recently.

The bulk of those teaser-rate loans – those that offer low rates for the first two years and then reset to much higher rates – will reset in the third quarter of this year because they peaked in the third quarter of 2006. That means there will be fewer foreclosures as a result because there will be few loans changing to those higher rates.

There’s a tremendous amount of household formation, 800,000 every year, Cramer said. Four million babies born each year, divorces, 2.5 million new citizen – they call create demand.

Immigration had been bringing in 1 million people a year, but that’s been cut back a bit. But both McCain and Obama are pro-naturalization, so that number could return to previous levels after November.

The horror shows that are the California, Florida and Arizona real estate markets are no longer bleeding into other areas. These heavy losses are being cordoned off, Cramer said, and different markets are evening out.

Lastly, even these horrible areas – Bradenton in Florida and the Central Valley in California – are bottoming. The first to fall is usually the first to return, Cramer said. He’s predicting that Miami and the Inland Empire are next.

Once that happens it will be the third quarter of 2009, and Cramer thinks he thesis will be apparent to everyone by then. So here’s the countdown: 309 days until June 30, 2009 – the deadline for a much-needed housing bottom.


Jim Cramer: Housing Bottom is Near

August 14, 2008

Nice positive mesage from Jim Cramer. He points to lower cancellations and pent-up household formation.

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Jim Cramer: Housing poised to recover

May 28, 2008

A pretty upbeat perspective on the housing market from Jim Cramer, who when last seen was bashing homebuilder stocks. He’s doing the same kind of root analysis that we do here at Frothing Developer

Cramer’s points:

  • 865,000 new homes purchased normally.
  • Lots of pent-up demand.
  • Price matters, and the price drops are having an impact.
  • Federal action to prevent foreclosures
  • April sales are up over March because of these factors
  • Typical bad 2/28 loans are coming to an end. Last quarter of 2006 was the end of those. By end of 2008, those loans will all have reset.

“Why no one thinks these things matter is beyond me”.

“How anyone could think things could get much worse is beyond me and flies in the face of reality….This is coming to a conclusion….maybe less than a year.”

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We agree.