Cramer: Housing Needs a Tax Credit

Jim Cramer

Solve housing. Solve collateral. If the Bush administration and the Federal Reserve had found a way to stop house price depreciation, we would never have been in this jam. But they wouldn't, in part because they endlessly fretted about inflation -- which was all driven by China and speculation -- and they didn't see the sheer numbers of foreclosures coming.

Everything comes down to housing. The wealth effect, a function of house values and portfolio values, is being gutted by both. You can't fix stocks -- they are reflective of earnings -- but if you stabilized home values, you could get some confidence, particularly given the collapse in oil. Stabilize housing, and you get a positive trend in consumer spending.

If houses stop depreciating, banks would be anxious to lend because the spread on what they pay and what they can lend at is huge. Bank of America (BAC Quote - Cramer on BAC - Stock Picks) will go from being the biggest casualty to a home run, if it can make it through the housing valley. JPMorgan (JPM Quote - Cramer on JPM - Stock Picks) and Wells (WFC Quote - Cramer on WFC - Stock Picks) would be rewarded for their consolidations, not punished.

But the administration never really addressed this issue. One, the homebuilding lobby was too powerful. We should have demanded, at the bank level, that these companies never be able to joint venture with banks. It killed the banks, but it didn't kill the homebuilders. There are still too many of them. How is Beazer (BZH Quote - Cramer on BZH - Stock Picks) still alive? Hovnanian (HOV Quote - Cramer on HOV - Stock Picks)? Doesn't anyone ever go out of business or get merged here?

Second, we needed very badly to cut rates. We did it too late. But then we came up with TARP, which would keep people in homes and buy bad whole loans from Bank of America and JP Morgan and Wells Fargo. Then Paulson just betrayed them, one of the most amazing, unopposed turnabouts in history. It really killed the Comericas (CMA Quote - Cramer on CMA - Stock Picks) and Keys (KEY Quote - Cramer on KEY - Stock Picks) and PNCs (PNC Quote - Cramer on PNC - Stock Picks), too. They were going to use this strategy to create good and bad banks. They failed. (Oddly, Citigroup (C Quote - Cramer on C - Stock Picks) is much less affected, but it doesn't matter because it has so many other issues.)

Now the foreclosures are setting records. Probably more than 50% of the homes bought in the 2005-2007 period are worth less the mortgage. That means 8 million people should walk away from their homes. We simply can't afford it as a nation. We will have a second Great Depression. It could be worse than the first.

All of this is why the Obama administration has it in its power to figure this out. It simply has to offer a VERY BIG tax credit to go buy a house. With houses plummeting in value and mortgage rates at historic lows (fabulous tinder for a housing bargain bonfire) a $25,000 tax credit -- it will have to be that big because the average home will cost about $250,000, and you need to put down 20%, so you would get half of it back -- would make it so those who have been waiting, and there are many more people WAITING than needing to skip from their homes, will pull the trigger. It is so simple. It is so logical. But he has yet to see, like the previous president, that the fundament of the problem is homes. Yes, we need an infrastructure jobs program of huge proportions to stop unemployment, but that's hard. That's a hard thing to change. Just going and buying a lot of Caterpillars (CAT Quote - Cramer on CAT - Stock Picks) or giving money to Aecom (ACM Quote - Cramer on ACM - Stock Picks) and Granite Construction (GVA Quote - Cramer on GVA - Stock Picks) isn't going to cut it.

But this tax credit, when coupled with the fact that we might have fewer than 500,000 homes being built, WOULD CHANGE THE PYSCHOLOGY of owning a home. That's what is necessary.

And it's doable.

In fact, is it the most doable thing that can be done. Why didn't Bush do it? Because he never understood the problem and he had no sensitivity to the problem and wanted to do everything voluntary. He was always, in the classic laissez-faire sense, more pro-capital than -labor and didn't think it was the government's job to intervene. You can see where that got us.

We are being given a second chance. Somehow, I don't think Obama will take it.

That's the real tragedy of this era -- another president who just doesn't seem to get it. Or at least he sure isn't talking about it.

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