Don't Panic Over Sub-Prime Mortgages

Every summer we see the same thing: someone gets bitten by a shark. The TV reporters rush down to Florida to get as much footage as they can. Then back in the studio someone at CNN gets some oceanographer on the air to put things in perspective. Yes, a shark attack is a terrifying thing to the person involved, but in the great scheme of things, it is rather a small risk to everyone else because these attacks are so rare.

Now, re-read the paragraph above, but substitute "sub-prime mortgage market" for "shark" and "CNBC" for "CNN" and you get the picture. The "sub-prime meltdown" story is the financial equivalent of the ubiquitous summer shark-attack story. Good entertainment, but bad risk assessment.

I'm going to make the numbers nice and round here to keep things simple and because we're trying to give you a rough idea of size. Real estate is about one third of national wealth. Sub-prime mortgages are about one seventh of all outstanding mortgages. Only about one eighth of the subprime mortgages are late in their payments. And only about half of the late-payers end up losing their houses. Of course, those houses aren't torn down-they're

sold to somebody else. For everybody who's forced to sell a house for less than it's worth, someone else picks up a bargain. The only cost is the transaction cost, certainly less than 10%, even counting broker commission and inconvenience.

In other words, we're talking less than about one tenth of one half of one eighth of one seventh of one third of our collective net worth.

Main Street investors have responded predictably-with panic. The rest of us are enjoying yet another day at the beach. Take a look at the chart to get a sense of just how big a predator the sub-prime mortgage is and then come on back in-the water's fine.

Mr. Bowyer is author of The Bush Boom and an economic adviser to Blue Vase Capital Management.

Copyright Human Events Publishing, Inc. Aug 20, 2007
Provided by ProQuest Information and Learning Company. All rights Reserved