A housing crash, when it comes (not if), will most likely be somewhat worse than a blip, but nowhere near the disastrous late-70s. Here's the thing: the US economy has been taking staggered hits for the past six years. The tech and travel sectors, oil price increases, manufacturing inventories, retail malaise -- we've already weathered them in successive years. Now it's time for housing and construction to take a breather.

The beauty is that all of the other sectors have already had time to restabilize. There's no question that a housing bust will hurt, but at the same time, there's no way everyone will be hurt similarly. Builders, realtors and mortgage brokers will see a few lean years. Housing, banking and mortgage companies' stock prices will drop. Most homeowners won't be affected at all, as the majority of home loans for the past 30 years were long-term, or variable rate with the adjustment period expired. Some of those who would be affected will just put off moving for a few years. Those worst off will be recent purchasers in the sub-prime market or as speculators, but neither are a huge percentage of the market (and no one is going to cry over the latter, at any rate). If anything, the ongoing talk about the upcoming housing crash should even shorten what pain there is, as those with an eye on the business section will have had a few years to plan ahead.

The only real question is whether the market improves sufficiently before or after the '08 election.

New Century Financial Corporation, touting itself as "one of the nation's largest subprime lenders" was on a roll.  Just a little over two months ago NCFC was reporting that the subprime market was booming and the real estate market was its oyster.  Two months later, how things have changed.  Now, when you try to click on any news releases listed on the front page of the NCFC web site you are redirected to a disclaimer page which essentially says "don't believe anything we've had to say over the past year or so."

This has all come about because the company is on the verge of collapse, under SEC investigation, and has been barred from being traded on the New York Stock Exchange.  The chickens have come home to roost for NCFC, due mainly to the real estate market has stagnated in many places.  I hesitate to say "bubble" because the market is still healthy in some areas.  But, for some markets, the costs of real estate has probably reached a point where it's not going to go up as sharply as it has over the past decade.

NCFC relied, indeed pinned its total business plan to the real estate market continuing to grow and grow and grow and grow.  That's because they were in the business of writing mortgages to people who probably shouldn't have gotten them and for as much as 125% of the market value of a property.  The idea was that they give a borrower $300,000 on a property valued at maybe $250,000 based upon an income which should have only been able to afford a $200,000 property, charge a higher interest rate over a three to five year period hoping that the borrower would either sell the property and settle the mortgage or find another financing arrangement and close out the loan.  Unfortunately, the same financially shaky sets of borrowers didn't improve their credit ratings or abilities over that period of time and so traditional mortgage lenders still wouldn't touch them.  Because a lot of the subprime loans involved adjustable rates which only increased over time or balloon obligations (meaning the entire balance was due on a certain date) the financially shaky borrowers were up against it and they began to get delinquent on their mortgages or default completely.  It was at some point in the process, that impressive loan production rates couldn't make up for the burgeoning red ink on the bottomline at NCFC.  In the meantime, corporate officers began selling stock, lining their pockets, in advance of the bad news they knew was happening.

NCFC is a disaster, but it is merely the iceberg looming in the path of the Titanic which is the entire subprime industry.  In point of fact, the damage wrought by what's going to happen to NCFC is going to be bad enough -- investors will lose whatever part of their shirts they have invested in NCFC and people owing money to NCFC are going to find they'll be pressed and pressed hard to pay off their notes.  But, at least, NCFC stands alone as a subprime enterprise.  The unfortunate thing is that there are a lot of subprime lenders which are spinoffs or subsidiaries of mainstream banks.    I know for a fact that Citizen's Bank has a subprime subsidiary (because a son of a friend got a mortgage with a 13% APR from them a year and a half ago).  If the subprime industry does go belly up, the question I have is what is the damage going to be to the parent bank in all this?  I know the lawyers probably artfully constructed filings and structures meant to keep the operations of the subprime subsidiary at arm's length from the parent.  But, you know you can sue for practically anything these days.  And, what's to prevent a parent bank from being sued for failure to properly monitor the activities of their subsidiary, especially when the parent was undoubtedly touting the success of the subsidiary in their annual reports?

Illegitimi non carborundum.