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"Fed Needs to Focus on Home Prices"

By Jim Cramer
RealMoney.com Columnist
12/14/2007 6:50 AM EST


"Would you ever buy a house in this environment? That's really the ultimate question that has to be asked -- that the Fed should be asking -- if this junk is ever going to come back to life.

I know some of it is so short-term that the jury's back and the verdict is guilty, but most of it hinges on a simple issue: housing depreciation. If you think that your house is going to lose value, default on the second home lien. Which then, we know now, means defaulting on the ultimate mortgage.

The Fed can tinker with LIBOR (I still can't believe they wasted the banking system's time with the LIBOR/auction plan). It can issue statements that are a little more pro-growth than neutral.

Or it can try to change the psychology of the home buyer and homeowner.

Part of what made 1990 be a transition year to a better time rather than a disaster was growth. We were able to outgrow the excess inventory of commercial construction. In other words, we ultimately needed the buildings.

Right now, as I go over the comments the last few weeks from Centex (CTX - commentary - Cramer's Take - Rating) and Pulte (PHM - commentary - Cramer's Take - Rating) and Toll (TOL - commentary - Cramer's Take - Rating) and Ryland (RYL - commentary - Cramer's Take - Rating) it's pretty clear that they are still, after all of this, too long lots and too long options and too long homes. That's after they've cut the number of homes they are building in half.

That's why, unanimously, everyone knows housing will be bad next year. The supply is still growing faster than household formation, the main reason why people buy homes year after year. People are postponing that buying, good people who could get loans, because it simply isn't worth it. That's what they think.

The fact that the private mortgage insurers -- MGIC (MTG - commentary - Cramer's Take - Rating) and PMI (PMI - commentary - Cramer's Take - Rating) -- are going back down has to do with originations. They were doing the old "new money in to bail out old money lost" thing, but the decline in buyers is wrecking their earnings.

That would change if the psychology of loss would change. Even though housing prices dropped 20% in a couple of months this fall according to Centex, they are still too high because they are not moving.

The universal belief that a house is going to lose money underpins all that is wrong but the Fed refuses to address it. The Fed doesn't want to. It just wants to tinker, Herbert Hoover-like, to fix the problem. The problem literally does go away the moment that the psychology changes.

Of course we are still too close to the peak build. How close? That's a tough one, as half the pundits say we are just finishing year one of the problem and others say we are in year two. I think we are in month 8 so I am obviously thinking pretty negatively. But even I think that in 2009 it might be right and I am planning accordingly personally.

But the Fed gets realistic that it is home prices, not three-month treasury prices, that is the culprit here, and only big cuts in interest rates to change psychology for banks, bank investors, and home owners and buyers, can really begin to stabilize the pricing that is the essence of the problem.


Random musings: Given that the close yesterday was nice and phony and the lift based on nothing, it looks like another day of suffering ahead. "

(in www.realmoney.com)