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Taking on Jim Cramer

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CNBC analyst Jim Cramer recently took on the media for highlighting the risks of ARM reset loans. (See Cramer blog dated August 28: "Housing is back, despite media worries.")

Although I disagree with his conclusion about housing, I do agree with him that the ARM mortgage problem has been minimized by the Fed keeping interest rates low. The risk of ARM resets is that homeowners' mortgage rates will increase when "teaser" periods expire. These resets work off indices, e.g., the one-year Treasury bill; therefore, as long as interest rates stay down, mortgage resets are not a huge risk.

Where Cramer misses the boat is his suggestion that a housing recovery is imminent.

The fact is that we may be bouncing along the bottom of the housing market. I do not think there is a lot further to fall. But, the suggestion of a recovery implies that housing numbers are going to start rising (units and prices) and the fundamentals are nowhere near suggesting such a prediction.

The great majority of sales, both of existing and new houses, which have occurred recently are in the lower end of the market with a huge impetus from the $8,000 tax credit, distressed sellers and historically low mortgage rates. Eventually those artificial stimulants to housing sales will end and then the fundamentals become important: supply and demand and consumer confidence in housing as an appreciating (or even stable) asset.

The problem is that there is nothing on the horizon suggesting an improvement in housing fundamentals in the near future. Perhaps even more concerning than supply and demand numbers is the paradigm shift in how housing is perceived by the consumer and investor. Whereas once home ownership was seen as a sure-fire path to a higher net worth, today people are much more wary (and obviously rightly so). People have learned the hard way that housing values do not always go up and most economists and housing experts believe that it will be at least 5 years or more before housing prices start to rise to any appreciable degree.

Cramer may like housing stocks, but if he is betting his ranch (pun intended) on the fact that housing prices will ever again spike like they did in the early part of this century, he'd better hedge his bets.

Jim Randel is the author of The Skinny on the Housing Crisis, a down and dirty story of how we got into enormous housing and foreclosure trouble. This book was just awarded First Prize in a competition sponsored by NAREE, an organization of 650 journalists.