Cramer’s housing bottom

Posted by Ray on August 24, 2009 under cnbc, Economy, Main | Be the First to Comment

Well, not exactly, but that is what many in the media are saying with one gentlemen on CNBC claiming the bottom already occurred on June 30^th. He actually said tonight that his call of the housing bottom was correct and on target. Here is the problem, he actually called it in the first or second week of June and he was not and is not correct. I am not sure what data he is looking at, but it must not be the same data that CNBC’s own Diana Olick and the rest of the planet is looking at.

As shown in a post on Friday the only real estate moving are the lower end homes, with 38% of all new sales in the below 100K price range and only 8% growth in the $100-$250K area, see exhibit: 1-1. Frankly, this is not a recovery at all as it shows mid-to-high end homes are not selling, period.

Exhibit: 1-1

U.S. Existing Home Sales Yr/Yr

$0 – $100,000	Up 38.8%
100,000 – $250,000	Up 8.7%
$250,000 – $500,000	Down 6.2%
$500,000 – $750,000	Down 8.9%
$750,000 – $1,000,000	Down 10.6%
$1,000,000 – $2,000,000	Down 23.3%
$2,000,000 +	Down 32.4%

I know what many of you are thinking, last week we had stellar existing home sales and you are correct. However, the 7% increase was merely the headline number and most people ignored the fact that supply also increased by 7%. The medium home value declined 15% lower year-over-year, plus the medium home value declined 2% month-over-month and in July we had record foreclosures to boot. It gets worse, the foreclosures are no longer just the nasty sub-prime borrowers, that number can hardly get much worse, but we are now talking conforming prime loans that are in trouble.

Below is a series of charts from the NY Federal Reserve bank showing Alt-A mortgages and the potential landslide that awaits us. I intentionally did not transfer the sub-prime data as that is becoming very irrelevant to our current housing situation. No matter how you cut it, there is no recovery. Mr. Cramer said that his bottom means that price will stabilize and stop going down. Admittedly, he did say that he did not believe home prices would climb.

Exhibit: 1-2 through 1-6

Serious Delinquency, Alt-A First-Lien This chart shows serious delinquency estimates by vintage for Alt-A first-lien mortgage loans at the national level. Serious delinquencies are defined as loans that are one of the following: ninety or more days delinquent, in foreclosure, real-estate-owned, in bankruptcy, or prepaid with loss. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.

Current Transitions, Alt-A First-Lien This chart shows the transition probabilities for Alt-A first-lien mortgage loans that are current at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.

Sixty-Day Transitions, Alt-A First-Lien This chart shows the transition probabilities for sixty-days-delinquent Alt-A first-lien mortgage loans at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.

Foreclosure Transitions, Alt-A First-Lien This chart shows the transition probabilities for Alt-A first-lien mortgage loans in foreclosure at the national level. The one-step transition probability is the probability of transitioning from one performance status to another in a single month. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.

Loss Severity, Alt-A First-Lien This chart shows the loss severity for Alt-A first-lien mortgage loans at the national level. Loss severity is defined as the average size of a loss if one occurs. A loss occurs when a foreclosed home sells for less than what the borrower owes to the mortgage lender. The amount of that loss includes the costs to foreclose and liquidate, as well as taxes and declines in property value. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.
Expected Loss through next 36 Months, Alt-A First-Lien This chart shows the expected loss through 36 months from the most current date; by market for Alt-A first-lien mortgage loans at the national level. Expected loss is computed using the probability of loss through 36 months from the most current date; this is calculated under the assumption that the most recent transition matrix for each date persists through the 36 months and that the most recent loss severity for each date persists through 36 months. The chart illustrates this historical projection for each historical remittance date. This report uses a 2 percent random sample of securitized nonprime mortgage loans from First American CoreLogic’s Loan Performance data set.

Based on this data it is reasonably safe to assume that the bottom is not here and after the government incentive is gone chances are the housing data will get even worse. Artificially supporting markets is not what the government should be doing, but I am afraid that will not be the case. I am sure we will see more foreclosure moratoriums in the near future which will give people hope that foreclosures are coming to an end. However, moratoriums simply postpone the inevitable and the fact of the matter is even the other mortgage relief programs are not working either. If we cannot stop the prime mortgages from defaulting then we have a major problem on our hands.

One might think I am singling out the Mad Money host and you are partly correct, but also partly wrong. Believe it or not I respect Cramer the money manager, he was great, but Cramer the TV personality is another story. He is what I call a revisionist of his own track record. He called for the bottom to be in place by June 30^th which is a gutsy call, but just because you make a bold prediction it doesn’t mean you cannot change your mind if you think you are wrong.

Now, he did change his mind and called the housing bottom early, right around the second week of June. I am not doubting it was a bold move, but when the data is right there and it shows you are not correct I am just beside myself on how everyone on CNBC adopted the “if we make it feel better, the it is better” approach to economics. I, like you, want this to be over, but I am not going to tell you what you want to hear, that would be irresponsible.

I admit I have not been correct on everything I have forecasted, but I have been reasonably close, like my market top call on August 7^th. Yes, the market rallied about 1% higher after that call, but it appears that it is going to stick for now, as it should. As much as I like to be right about things, and believe me I love to be right, I am not perfect and I certainly do not revise history to make it look as though I was. Unlike TV everything I write is in print and time stamped so you know what day and time I post my forecasts.

The bottom line is this, the housing market has a very long way to go before it hits bottom and an extremely long-time before their will be a rebound in prices. I have no idea when it is going to be, but my guess is the bottom is probably 8 months off and a recovery, who knows, a year or two perhaps. The one promise I will make is I will not be a revisionist on my track record. In fact, I make no guarantees or warranties on my track record as you should look at what I have to say and then confirm or debunk it.

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