Monday, August 25, 2008

Subprime synergism

The always well-done Sunday New York Times business section offered me two great reads this week. That they're actually related to each other is even better.

First, actor and author Ben Stein offers a little perspective on the unfolding subprime mortgage crisis.

The 10-cent version? Yes, a lot of people were too eager and too greedy in conjuring qualified mortgagees out of thin air. But that's not the whole story -- "subprime mortgage" doesn't deserve to be a dirty word, since the financial vehicles allowed a large number of people to do what is, at its essence, a very good thing: buy and keep their own homes. Subprime mortgages represent about 10-15% of all U.S. mortgages, and so far, about 10-15% of subprime mortgages have gone into default. The unraveling is going to be painful, but let's not pretend that every single U.S. homeowner has suddenly stopped paying off his mortgage, Stein writes.

Not that there aren't pockets of truly astounding real estate implosions across the U.S.A. as this excellent feature on real estate in Merced, Calif. by David Streitfield shows. A suburb of San Francisco, Merced's an excellent microcosm for the worst aspect of the U.S. housing boom, and serves as a cautionary tale of what might be to come. Prices are down about 50% from their 2005 peak. This bleak quote is probably the piece's money shot:

With as many as 2.5 million homes in the United States entering foreclosure this year and, at best, sales of only 5 million existing houses, the foreclosure price is becoming the rule in many areas. In Los Angeles County, whose 10 million people make it the most populous county in the United States, a third of the sales are foreclosures.

How is this all going to play out? I have no idea. But like anything else, I think the reality will be somewhere in between the outcomes predicted by the sky-is-falling doomsayers and the "everything is fine...keep shopping" optimists.