Jim Cramer trashes IE

CNBC host Jim Cramer, never far from the fringes of any financial argument, has now claimed the "sky is falling" perch in the housing debate. In this video, Cramer rants that the Inland Empire is so awash with bad loans and unsold houses that it needs to be "plowed over"; he predicts a 100% foreclosure rate in 2/28 mortgage products; and encourages upside-down homeowners to be "smart" and walk away from their houses.  Wild stuff, but hey, he's Cramer.  Partial transcript:

"I'm looking for a 100% default of the 2 and 28's. 100 percent. The bears are looking for 50 percent. I'm saying that they're foolish and way too optimistic.... Now, where are these 2 and 28 loans concentrated? Largely in Florida, in Phoenix, in Las Vegas, in the Southland of California, the northern part, Sacramento, but most importantly, the Inland Empire. I think the Inland Empire needs an agricultural adjustment company. ... we need to, like, plow over the Inland Empire, because there's so many more homes. And the homebuilders have way too much inventory. And the people who have made these loans whoever, where the mortgages are, I think almost everything that was written from May of 2006 until the end of the year was worthless."

More, he's just getting going: "When your house drops 20% in value, then it doesn't matter whether you're prime or subprime. It's better to walk away, even if you're wealthy. Because you don't want to lose your credit card, and you don't want to lose your car. Your house is the one thing that's fungible. It's smart to walk away...  It's actually a good thing. I know that sounds a little counter intuitive. But if your home declines 20% in value, it's really important to sell it, or walk away from it."

More: "I'm calling for a dramatic decline in home values... I've sold all my real estate."

What's going on? Cramer is a smart guy, a good market-timer, but there's no gray in his world. It's black, or it's white. It's great, or it's awful. You should own it, or you should run from it. He's jawboning the Fed to cut rates to save housing. He's telling the Fed the sky is falling.

Does it matter? Yes, we think so. Cramer is influential.  We're not saying he can influence the Fed; we're saying he's a smart, opinionated, outspoken guy who frames -- and then screams -- investment arguments for some traders and investors.

Your comments? Thoughts?
Hat tip, big time: Morgan at Blown Mortgage.
Photo Credit: Booksamillion.com

Comments

[Morgan]

Whether Cramer actually believes what he is saying or not - he's always been one for theatrics - the fact of the matter is that when you have a Jim Cramer putting together a sound bit this powerful it is bound to raise some eyebrows.

He makes some points which are too far fetched "100% default" but other points are well said. My favorite is "If you're home declines 20% it doesn't matter if you're subprime or prime - that distinction goes out the window."

This is so true - FICO scores do not make mortgage payments. If you're in a loan with payment shock your 800+ score doesn't print triple the money each month for you to manage that change.

[Tom]

Bah. Cramer is a hack. You don't treat real estate like stocks. So what if real estate drops 20%? If you live in the place and can afford the payments, just ride out the recovery cycle. If you're an investor and your renters are covering the monthly nut, why sell? Yeah, those 2/28 ARMs are going to create a bloodbath in IE, but that's not to say that EVERYONE in IE has an unmanageable mortgage. Anyone who bought before, say, 2002 shouldn't have any problems. Will values go down? Of course, it's inevitable and it's healthy. It should have happened three years ago. The cost of housing has far outpaced income for most people. The banks were just writing loans with thinner and thinner requirements to keep the ball rolling. Now that the hammer has dropped, sanity will finally return. The question is, can the economy handle hundreds of billions of dollars in monopoly money evaporating overnight? We will see.

The Fed can and will do nothing with interest rates. If they raise rates, it could spur the much-feared recession...Which will probably happen anyway. They can't lower rates because inflation is such a huge problem right now. We are stuck in that happy place called "stagflation". Housing cannot be "saved" by lowering interest rates anyway. There is nothing TO save. The banks have tightened their criteria and they are not giving money to unqualified people anymore. The Fed has nothing to do with that.

Cramer should stick to jumping around like a monkey on speed screaming random stock picks and keep is opinions on real estate to himself. He clearly knows nothing about it.

[Howard Veit]

From what I have seen, Cramer is right. Almost all those dopey loans were made to people who could not afford to buy a home on conventional terms, and so jumped at the chance to "steal" one. While most of the webzines were reporting on it, you guys at MSM just sat on your hands. How bad is the default situation? We won't know for a while yet. The only thing wrong with Cramer's remarks is that most of the loans forbid "walking away."

[www.BetterVillage.com, XYZ, PDq.]

A commenter on the blown blog said this:

"To be fair, the segment that this occured in was a thought experiment where he was presenting the worst case bear argument. Before, after, and several times during the segment he noted that this wasn’t his actual opinion as to the current state of the market."

Twould be nice if we knew when this aired.

Great article today on perceptions in the NYT:

http://www.nytimes.com/2007/07/31/health/psychology/31subl.html

[Inland Empire]

Sorry but the IE consists of more than just new tract houses with bad loans. Maybe he should have done more homework.

[Ragnar]

Well, this guy seems to be a fun topic of conversation, in a love him or hate him kind of way. Even if he is excessive, at least he has an opinion. Bulldoze the IE? Nah, even if there is a 100% forclosure rate on 2/28 loans as he claims, the population will steadily increase until the point that all of those homes are sold again. The builders of new construction will just need to tone it down a bit in the meantime.

[John Singer]

So I guess Cramer wants us all to sell our homes and move to Europe. Please...Although he would tell us now to put our money in tech stocks instead, maybe not such a bad idea considering his impressive track record with Google's stock here http://www.stocktagger.com/2007/07/jim-cramer-google-inc-goog-track-record.html

[Steve]

I just hope the Fed doesn't delay the crash by lowering rates. That's what got us into this mess in the first place, the Fed trying to mask the recession of 2001 by lowering rates and making homeowners "feel" less pain. The CA market desperately needs a fatal crash to bring prices down to affordable levels. When college-educated employees can't afford housing, something is wrong.

[Don Hosek]

I just hope that those people who are walking away from their homes understand the tax consequences. If the bank takes a $100K loss on the loan, you're looking at a tax bill of $30-40K. And until you've paid it off, you will not get any sort of credit worth having. Need a car? Pay cash, or pay too much from one of those no credit/bad credit places who will charge you twice blue book for a car which dies after 3 months.

[Pete Viles]

BV quotes another who says: "To be fair, the segment that this occured in was a thought experiment where he was presenting the worst case bear argument. Before, after, and several times during the segment he noted that this wasn’t his actual opinion as to the current state of the market."

I find no evidence that the above is remotely true. You can watch the video on Cramer's webstie, TheStreet.com (Link:http://videoplayer.thestreet.com/?clipId=1373_10371063&channel=Cramer+On+Demand&cm_ven=&cm_cat=&cm_ite=&puc=swtile&ts=1185891389733&bt=NS&bp=MAC&bst=SF&biec=false&format=flash&bitrate=300)
There's no mention of a "thought experiment," and Cramer does NOT say that this is not his actual opinion. In point of fact, there is a second video that is equally bearish, in which Cramer argues the homebuilders are in deep deep trouble.

[Mojave Girl]

"Sorry but the IE consists of more than just new tract houses with bad loans."

You're right, Inland Empire. In response to your quote above: the IE consists of run down, gang infested, meth-lab neighborhoods and has the HIGHEST welfare rate in the nation, and it's got the worse smog in So Cal. the only people who move or live there are the marginally qualified who had no choice but to take out the 2/28 loans that are soon going to kick them to the curb.
IE should be renamed California Appalachia. Good luck!

[Inland Empire]

For Mojave Girl....sounds like you are looking out in your own neighborhood. Maybe Barstow? As far as highest welfare rates, I think that crown belongs to Utah if you do your homework.

[www.BetterVillage.com, XYZ, PDq.]

Pete, I can't find any evidence of it either. Tried the link you posted, but the video didn't load. This guy is wildly popular, and probably dangerous... you can access the video on their site, but it looks like exactly the same video as the youtube, played in it's full intended context. Probably shouldn't give him any more credence by sending people over to his site. It's a shocker, and probably meant to go "viral." I've noticed that those old internet chain letters and "virus warnings" have dropped off to almost zero.. so it looks like this baloney can be defeated by just ignoring it and not propagating it. That said... what's the deal with the Rolls Royce with the hood up in the background during the video ??? Just to attract more attention?

[mike d.]

Don Hosek said:

"If the bank takes a $100K loss on the loan, you're looking at a tax bill of $30-40K. And until you've paid it off, you will not get any sort of credit worth having."

Actually I think that's only the case in a short sale. If you simply walk away and let it go into foreclosure you'll take a hit on your credit score, but there's no tax liability for the difference. Your house is the collateral on the loan, and they aren't forgiving the loan (as is the case in a short sale, which is why the IRS sees it as income), rather they're going to take the proceeds from the sale of it at auction and have to eat any losses.

[Vulture]

I'm really eager to bounce on this market if/when Cramer's prediction come to bare. I've got the capital and access to more. But I'm not a CA native and don't know the IE. Can someone please educate me on the BEST, SAFEST, and most PRIME area/town in the IE? I tend to focus on prime property only and I prefer buildings to individual units or houses.

Much gratitude for your valued thoughts.

[Inland Empire]

For Vulture - Claremont, Upland, Norco, Rancho (Cucamonga/Mirage/others), Temecula, Palm Springs, Redlands, Loma Linda and probably quite a few others are considered "good" areas but may or may not suit your needs.

[Mark]

Mojave Girl, there are so many nice areas in the Inland Empire, you obviously don't know what you're talking about. I find that the people who think they know the most about the IE are the Westsiders who believe that anything east of the Hollywood Freeway is "the IE".

Another comment: Are you suggesting that, as opposed to the IE, Los Angeles proper is a beautiful, smog-free city full of well-educated, responsible citizens? If you are, I have to laugh at you.