Jim Cramer, host of the widely acclaimed show “Mad Money,” recently said on one of his shows that you need to buy a home in the next six months. He is basing this argument on the fact that banks are calling the bottom on the housing market, along with the new housing bill which was just passed. So this begs the question: Is Jim Cramer some sort of financial mastermind, or is he just plain mad?
Beyond the fact that calling the bottom of any cycle is nowhere near an exact science, the most recent financial data is not looking good for the housing market. Job losses are increasing, foreclosures are continuing to mount and mortgage delinquencies are spreading beyond subprime debt. In my blog post yesterday I quoted the head of one of the biggest banks in the country as saying the outlook for their mortgage debt is “terrible.” Even if Cramer is correct, and right now marks the bottom of the housing bubble, it probably still isn’t the best time to buy. Housing prices are not just going to stop falling all at once; when they do turn around it is likely to be gradual. Saying that the time to buy is right now is a pretty far reach in my mind.
He is basing his prediction mainly, it seems, on banks and the housing bill. I see a couple problems with that. First off, the banks have not shown at all that they have a strong grasp of the housing market. How much money have they lost so far, after all? Saying they have predicted the housing bottom, so therefore it must be the bottom, seems pretty dumb. If anything, knowing that they have predicted the housing bottom would make me even more scared than I already am. Secondly, he thinks that the housing bill is going to aid the market. Looking at the housing bill, it doesn’t appear that it is going to have the impact that he thinks. There is a $300 billion FHA measure, a tax credit for certain home buyers and the Fannie Mae and Freddie Mac aid. Those are the main provisions meant to save the housing market. I look at those and just think, “Oh man, I wonder how much this is going to cost me.” The FHA measure is going to help people refinance out of loans, however, as I mentioned in a post about the prior FHA loan aid, it didn’t turn out to have the impact that was hoped for. The loans ended up going to people who probably would have been fine without them, so basically these homeowners got a nice taxpayer subsidy, but it really didn’t help stabilize the housing market much. Obviously this new aid is on a larger scale, but I think the same thing will happen--in the end, we are likely to be disappointed. The Fannie and Freddie aid just makes official what we already knew--that the government was going to bail these companies out no matter the cost. So this might have relaxed the nerves of some Fannie and Freddie debt investors, but the move isn’t going to change all that much. The tax incentive may have some impact--that remains to be seen--but again I don’t see it as a market changer. It is possible that Cramer is right on this, but I’m not sold quite yet.
Also, Cramer didn’t really differentiate between buying a house that you plan to live in or an investment property. If you are in the market for a home to live in, then I revert back to the “you’ve got to live somewhere” rule. Trying to time the market is futile and not worth the happiness and comfort of your family, so if you are looking to buy a home to live in, do it--but make sure to buy within your means. If housing prices are beyond your means, then you shouldn’t be buying. End of story. If you are looking at investment property, on the other hand, then depending on the area and your strategy, it may make sense to wait for a better deal. I’m a big proponent of cash flow real estate, and either the numbers work or they don’t. I don’t factor in appreciation, so as long as the property is cash flowing now, and I can safely presume that it will cash flow well into the future, then ultimately I know I’m going to make money on the deal regardless of the real estate market fluctuations.
5 comments:
It's a perfect time to buy a house, but not if you're deep in debt and cannot manage money, if so you will be in a sub prime loan, and you will pay more for less
I like this show very much and I also think that this is the good time for buy a house.
I don't think this is the bottom of the housing marketing by any stretch. This downward spiral has hardly even slowed and people are not understanding that their original home investment of just a few years ago has not appreciated from their purchase price. Infact it has done the reverse and that's a tough pill for people to swallow. The bottom is still ways away and I think it's going to be an interesting next 7 years to see what happens with all these people who are currently upside down on their homes yet can still afford to make the payments.
"Even if Cramer is correct, and right now marks the bottom of the housing bubble, it probably still isn’t the best time to buy."
Uh, you must not understand trading. The bottom is the best to buy. You can dispute whether he is correct, but if you assume that he is correct, then you can not say that it isn't the best time to buy. It's a logic argument. Also Cramer isn't basing it solely off the housing bill and banks. He is basing it off an a well-worn trading maxim: buy when everyone else is selling (or not buying). There are so many people who are now real estate "experts" and are quite confident they know the future price of real estate. However, real estate is a market just like any other market where goods are freely traded between free and independent-minded people. This means that prices are highly influenced by mass psychology (i.e. how everyone feels about the market). Since everyone thinks the market is horrible you can start buying now because when people start to realize that the market isn't as horrible as they think, it will rebound very quickly.
It is JUNE 2009 and no bottom.
Ok I will call the housing bottom once every year and I will be right one year. I will be know as the great swamy :)
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