THE BASIS POINT

Kudlow Hot On Housing, Cold on FHA, Questionable on Credibility

There’s a reason Larry Kudlow is a star on CNBC: he sparks debate by taking hard lines on market issues, or really any issues. Like last year during an entertainment industry riff when he declared that all rap music is misogyny and violence “up and down the line.” This example helps explain the problem with a man who’s an otherwise well-informed market journalist: he’s not on the ground level. What does Larry Kudlow, a man who surely takes Town Cars from one controlled environment to another, know about rap music? Or about the deal-to-deal level of the housing market?

In a written piece today, Kudlow made some good points about how the mainstream media is missing the housing bottom.

The median existing home price has increased four consecutive months and is up 10 percent since February. Yes, it’s down 6 percent over the past year. But the monthly numbers show a gradual rebound. Actually, this median home price is $215,000 in June, compared to $196,000 last winter. And there’s more. One of the hardest hit regions is the West, including California, Arizona, and Nevada. The other two bad states are Florida and Michigan. However, existing home sales in the western region are up four straight months, and are 17 percent above the low in October. At the same time, prices in the West have increased three straight months.

Meanwhile, overall national existing home sales are basically stabilizing at just under five million. And in the first and second quarters of 2008, these sales dropped slightly by 3 percent in each case, which is a whole lot better than the roughly 30 percent sales drops of the prior three quarters.

These data are real. Even Chip Case, co-creator of the S&P Case Shiller Home Price Indices, has suggested that housing data could turn positive more quickly than many believe.

But then later in his analysis, Kudlow suggests that the imminently-approved $300 billion fund for the FHA to refinance and insure distressed loans may cause the FHA to take “the very worst loans on the books.”

This is where Kudlow and many like him show how far they are from the trenches. They’re strong on the macro stats, but weak on the guidelines required to get these deals done. These loans require 45% or lower debt-to-income ratios, and the income is calculated using 30 months average income for commissioned or self-employed borrowers (or current income for salaried borrowers). If lenders write down existing debt to a reasonable LTV as proposed so that they take the hits on their own bad paper from recent years, then this new paper doesn’t get much better: full doc underwriting, no loans above $729,750 and 90% or lower LTV on properties that are starting to find a bottom.

It makes for good sound bytes when Kudlow rips the FHA or other macro pundits say this housing package won’t do anything but benefit vote-seeking politicians. And those arguments are easy to make when you’re in your exalted media tower. But on the ground level, deal-to-deal, house-to-house, this housing package will change lives.

As for Kudlow’s provocative style, it’s obviously great for ratings. But we believe that if someone is more market provocateur rather than market participant, the hard lines they take eventually break down.