October 2007: When Housing Hit Home

October 2007: the month where pretty much everything went awry in America. October 2007 proved to be the most dismal month for retail I can recall in years, with outfits like Kohl's (KSS - commentary - Cramer's Take) and J.C. Penney (JCP - commentary - Cramer's Take), consistent outfits with good merchants, just got slaughtered. It was a month where Macy's (M - commentary - Cramer's Take) showed that the whole merger may have been a fiasco.

With the exception of Wal-Mart (WMT - commentary - Cramer's Take) and Target (TGT - commentary - Cramer's Take) nobody delivered anything worth writing home about, and Target's gone to near its 52-week low anyway and was downgraded twice, including a UBS downgrade today, on worries about no credit card sale and weaker Christmas.

Home Depot (HD - commentary - Cramer's Take) amazed me in its miserable performance, I still can't believe they did that knuckleheaded buyback. Starbucks (SBUX - commentary - Cramer's Take)? All I can say is that I'm glad I stayed negative.

Some of it was weather, plain and simple. But most of it was housing. This is a year where the models are simply not working, and the best model for predictions -- the employment model -- is completely broken.

Put simply, the declines in housing in the month of October were breathtaking in their scope and depth, with one of the largest banks in the country, Wells Fargo (WFC - commentary - Cramer's Take), talking about homes being the worst since the Great Depression.

Ouch.

Homes have their tentacles in the U.S. economy, but until October, those not trying to sell their homes didn't seem to mind the decline. Somehow, things crossed over in October. The sense of loss hit home.

And despair. Because without Fed relief you are going to see home prices fall for at least another year.

Why would it ever stop? Because of supply and demand. We will be down to close to 1 million housing starts this year, and that's with all the publicly traded homebuilders pumping out homes to satisfy creditors and not take impairments. The decline in build rates is part of a slimming down of the public builders and a terrible decline in the fortunes of the private builders.

Household formation has historically run to about 800,000 new homebuyers coming on the market. You have to believe that we might not build as many homes as we need for new people. Of course, there is $1.25 trillion in unsold homes on the market, so home creation may not mean all that much. But there is growth in the country and we can work off the inventory eventually.

October was not helped by the rise in prices for just about everything because of the commitment to natural renewable fuels driving up food and the declining ability to produce oil. Things were not helped by the outsized layoffs in auto territory, contributing to the escalating defaults in California and Florida. The national unemployment figures mask an unhealthy decline in financial services jobs.

All in all, that makes a Kohl's or a J.C. Penney an accurate barometer of what's happening.

Of course, Ben Bernanke doesn't want to be known as the guy who stops the market from doing what it has to do. He does not want to have a "put" under the market, which is ridiculous Wall Street-ese for wanting to stop the decline of the stock market.

But much of the American psyche is predicated on home values being stable or advancing. Much of the mortgage pipeline, the endless, unfathomable structured investment vehicles -- thank heavens America's best banker, John Stumpf, was stumped by them -- need higher home prices or at least stable ones. All of the mortgage insurers, the ones who insure the CDOs and the ones who insure the individual mortgages, need higher prices. Heavens, but the run on Fannie Mae (FNM - commentary - Cramer's Take) and the run on E*Trade (ETFC - commentary - Cramer's Take) need housing to stabilize.

But it can't. Not until people feel that they won't lose money in their new home or can't get the credit or down payment they need to buy it.

So, October's a disaster. And that's why, despite the belief that the Fed has done enough -- something I actually hear from many quarters -- lack of an ease will translate to even lower stock prices than we have had.

Not what we need today, given how so many stocks seem to be gravitating to the lower strikes for options expiration.

Random musings: Is Ameritrade (AMTD - commentary - Cramer's Take) in talks to buy E*Trade? I don't think so, despite hopes from the bulls, given that its ad campaign today is about avoiding a broker that could be insolvent.

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At the time of publication, Cramer had no positions in the stocks mentioned.

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