Industry Figure Tom Chappell

My old friend Industry Figure Larry Helmerich and I have long marveled at the booming housing subprime lending crisis. We recently asked each other why so many of the people that we know, who are seemingly smart, don’t see the problem with the surety that we see it?

(And to be clear: housing prices are going to fall 25% before they start to rebound. That’s the optimistic scenario, as far as I’m concerned. Housing prices must fall, substantially, before everything comes back into balance — there’s not really any way around the Bad Thing.)

Why are Larry and I immune to the blindness that afflicts so many? We don’t have a horse in the game: we’ve both lived in our current houses for the last 20 years. If our houses lose half their value, we’ll still be fine.

I’ve written before about the Impending Doom — a surprisingly long time ago, in fact. But it’s coming, my friends. Consider this quote from a recent New York Times article, sent to me just now by Larry:

…in many of these neighborhoods, a heavy mortgage debt has led thousands of residents — many of them first-time homebuyers — close to financial ruin, experts and local officials say. According to recent census figures, more than 40 percent of Newark homeowners spend more than half their income on housing, one of the highest percentages in the New York metropolitan region and among the highest in the country.

So: more than 4 in 10 people spend over half of their yearly income…to live in Newark, New Jersey. And while it is the Garden State, a lot of those “creative” financing deals made in the last several years (no money down, low initial interest rate that jumps up substantially after two years, with an adjustable rate after that) are due for that first big jump soon.

In California, homeowners are finding that while they could scrape by and make that old $4,000/month mortgage payment, their new $6,000/month mortgage payment is impossible. Many have put their homes on the market, but buyers are sitting on the sidelines, and with home prices down, those who haven’t owned their homes for very long and who didn’t pay much money down are under water, owing more money than their homes are worth. As banks start foreclosing, and speculators dump their investment purchases, that’s going to put even more units on the market, priced to move.

And God help us if the Chinese ever lose their taste for SquanderBucks.

Read the Full Story at The New York Times:
“Behind Foreclosures, Ruined Credit and Hopes”
March 28, 2007