Cramer: The 'Single Greatest Play' on the Housing Recovery

CNBC's Jim Cramer sees two "incredibly" bullish signals for bank stocks: a shrinking number of underwater mortgages and a rising net interest margin. He says that one company in particular may benefit disproportionately: Wells Fargo.

In a report from CoreLogic released Wednesday, there were 9.7 million properties underwater in the U.S. during the first quarter of 2013, down from 10.5 million in the fourth quarter of 2012. A home is considered "underwater" when the underlying value of the property is less than the principal owed on the mortgage.

(Read More: More U.S. Homeowners Get Back Above Water in First Quarter)

"To me, Wells Fargo is the single greatest play if you think houses are coming out from underwater," Cramer said Wednesday on "Squawk on the Street," remarking on the company's "ability to take the collateral and make new loans."

A lower number of underwater mortgages "is very significant," Cramer said, citing the CFO of Home Depot, who said that when a homeowner goes from underwater to above water on their mortgage, they spend three times as much at the retailer than they would otherwise.

Cramer also said that news of rising interest rates are causing people to pull the trigger on refinancing and home purchases.

(Read More: Buyers Ignore Surging Rates, Send Mortgage Apps Higher)

"I think people come off the sideline," he said. "You gotta plunk the money down now because the housing affordability, which is still fabulous, that does go away if rates go up."

"I think we can't overemphasize housing punch above its weight if it continues to make it so that home prices are going higher."

(Related: Gradual Rise in Rates Won't Stop Housing Recovery: Lennar)

"It's a feel good story" that far outweighs the effect of events in Turkey on U.S. markets, Cramer said. "You've got to put it in context."

The other factor—net interest margin—is something Cramer said bothers him about the market's current perspective on the bank sector.

"For the longest time, we wanted to see net interest margins go up," he said. Now, with rates on certificates of deposit (CDs) as low as they are—the highest national rates on one-year CDs are around 1 percent, according to—banks can invest these deposits in government bonds with higher yields and generate "a huge net interest margin, gigantic," Cramer said.

(Read more: Rising Rates Scare Borrowers Into Action)

"Net interest margin is going to explode this quarter. When you can give the depositors next to nothing and invest that same money. ... It is incredibly bullish" for bank stocks, he said.

Disclaimer: Jim Cramer's charitable trust owns shares of Wells Fargo.

—By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul.