Let me start by saying that, while I am a respectable married woman, I LOVE Jim Cramer.
Those of you who don’t know who Jim Cramer is aren’t among the 1 million YouTube viewers who have watched him freak out — there’s really no better term — over the past week. Cramer is a stock market investor and commentator, probably best known for hosting “Mad Money” on CNBC and co-founding TheStreet.com (an Internet media business that I lost a couple thousand on the options of, but hey, I love this guy so much I forgive him).
Cramer — who graduated from Harvard 10 years before I did — has developed his media reputation as a man who froths at the mouth, but the CNBC video clip currently circulating is over the top, even for him. You watch him doing market commentary on interest rates and the current situation of Wall Street firm Bear Stearns, and you really think the guy is going to have a heart attack.
His argument, basically, is that markets are in peril unless the Fed opens the discount window. “In the fixed-income markets, we have Armageddon,” he says quite confidently. “Seven million of them (people who took out mortgages in the last three years) took teaser rates or took piggyback rates; they will lose their homes.”
Wow. That sounds really bad.
But is it true? I know that out there in America home sales aren’t good, but here in the Northeast, the New York City area is bubbling along like a root beer float. The manicured suburb where Cramer is reported to live boasts an average sale price of $1.2 million, an increase of more than 10 percent from the year before (stats courtesy of Sue Adler at Keller Williams, who has lots of other helpful stats on her site sueadler.com).
Are those buyers on teaser rates? Maybe. My Wall Street clients are certainly happy to take interest-only mortgages to get them into seven-figure housing territory.
It doesn’t matter really; what matters is the second half of the statement, that people will lose their homes.
Now I understand very personally that rising rates aren’t good for debtors. I have not one, but two, 5/1 ARMs, and they’re both going to blow up next year.
But first off, interest rates aren’t very high yet. They’re bumping around towards 7 percent, which is a lot in the context of the past five years, but hardly usurious.
Secondly, my ARMs — and I would suspect many of the teaser packages that borrowers took out in the past few years — have reset caps, so my worst case is a 200-basis-point-per-year rise. In my case that means the worst I would get hit with is a jump from 5 3/8 to 7 3/8, which is still not bad by historic standards.
And third, if the interest rate goes up on my beach house to the point where I no longer want to carry it as an investment, am I really losing my home?
This is the whole problem with the commentary about the subprime mortgage mess — there are clearly human costs, but no one can really be specific enough about what they are. One report might be about a family with grandkids being evicted; a second a speculator in Vegas whose credit catches up with him; a third, indicating a nervousness about Wall Street jobs. Each is a snapshot, and a scary one, but how generalizable are they? Are we seeing a cloud no bigger than a man’s hand, and is it going to turn into a big, big storm?
I’m a little worried because I’m just starting to find my footing in this business, and I’d hate to have the fun come to a stop just as I’m learning what I’m doing. Certainly in my markets, no one is boarding up the windows just yet, but sellers have started offering buyers closing cost incentives on the order of 2 percent of purchase price. That doesn’t indicate Armageddon (or, if you will forgive me my joke, ARM-ageddon) but it does mean we might get hit with a little splash or two of rain.
Alison Rogers is a licensed salesperson and author of “Diary of a Real Estate Rookie.”