Here's What a Bottom in Housing Means

Fannie Mae (FNM - commentary - Cramer's Take) auctions properties at 50 cents on the dollar. Buyers are found for no-nauction purposes when houses come down 40%.

With that, you get classic supply and demand kicking in. And you get a bottom.

This morning's excellent article on Bloomberg.com highlights the success Fannie is having auctioning off even unfinished property. The propensity is to say, "speculators are buying," but the simple truth is that there are multiple buyers at these levels, and if the speculators pay more that's because they sense bargains.

Why is this so important? Look at Wells Fargo (WFC - commentary - Cramer's Take) -- foreclosures is the issue. Same with JPMorgan (JPM - commentary - Cramer's Take). If you get any sense that housing prices might be bottoming, all of that upside-down mortgage stuff will go away. We are getting some relief at WFC with mortgage applications up 158% -- another sign of a bottom -- and I am still going with my June 30 call.

One of the great misconceptions is that people will walk away from homes if they are totally underwater on their mortgages. There was a huge wave of that with those who came in late to buy and put down nothing. There's also a wave coming of people who lost jobs or people who bought ill-fated pick-and-pay methods of mortgage financing. I think, though, if people sense that their house could be increasing in value, they lose the incentive to walk away and they hold on for dear life.

That's where we are. It is a virtuous circle up. People immediately ask, "Does that mean you want to buy the homebuilders?" Integral to my bottoming thesis is that you DON'T want to buy them because they are going to run out of money, and banks don't have more money to give to them. Toll (TOL - commentary - Cramer's Take) won't, and if you want to, you can buy that one. But it is much better to buy Lowe's (LOW - commentary - Cramer's Take), Home Depot (HD - commentary - Cramer's Take) or Sears (SHLD - commentary - Cramer's Take). It is better to buy Black & Decker (BDK - commentary - Cramer's Take). You can speculate in a KB Home (KBH - commentary - Cramer's Take) or a Horton (DHI - commentary - Cramer's Take), but the quarters will be miserable and the balance sheets stressed, so what is the point?

Risk-takers, of course, can buy WFC or JPM -- as I am for Action Alerts PLUS, but those are not for the squeamish.

At the time of publication, Cramer was long JPMorgan, Wells Fargo and Black & Decker.

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