24 Sep 2008

Cramer Says Paulson’s Plan Will Stop Home Price Declines

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Help me out here folks. In the following passage, Jim Cramer has committed himself to predicting that house prices will stop falling if Paulson’s Plan gets approved. Right?

Opinions abound when it comes to Treasury Secretary Henry Paulson’s proposed $700 billion bailout plan for U.S. banks. And a lot of them are negative. But Cramer’s a strong supporter, and he used part of Tuesday’s Mad Money to clarify what he sees as people’s misconceptions about the plan.

It doesn’t address the real problems of people losing their homes.

Wrong. Declining home prices are the reason owners are either walking away or being forced out. Paulson’s plan puts a stop to the root cause of this: foreclosures. Other housing-related problems, from making mortgage money available to shrinking inventories, are being solved. This plan takes care of the last one.

The plan costs too much.

Actually, it might not cost anything. Once Paulson’s plan is put in motion, home-price depreciation should stop. That means the mortgage-related paper the government will then hold would no longer be worthless. Plus, the government can work with owners in any way necessary to keep them in their homes. And it looks like Washington will be taking an equity stake in any company that takes part in the plan, which means there’s even a chance to make money rather than lose it.

I haven’t thought it through too carefully, but I am surprised at the confidence with which the Mad Man says… Oh wait, he hosts a show with the word “Mad” in the title. Remind me again why CNBC features him, and he has such popularity that I feel the need to discuss him?

Don’t misunderstand, dear reader: Cramer’s prediction could be right. For example, the housing and capital markets are now so so so screwed up because of Hank “The Oligarch” Paulson, that home construction might be a relatively long-term investment project that no longer makes economic sense. So the supply of new homes entering the pipeline won’t come back to its pre-boom level, and once we burn through this glut of houses, they will become very scarce. Yet I don’t think that’s what Cramer has in mind when he says Paulson’s plan will stop home price declines.

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