big hair: How Big Is the Sub-Prime Mortgage Market?.?

How Big Is the Sub-Prime Mortgage Market?.

Ben Stein said it well this past Saturday on Fox鈥檚 Cavuto on Business: The sub-prime mortgage problem is grossly overstated; the sector is just too small.

Smart guy, Ben. Ferris Bueller never should have skipped school that day 鈥?he would have learned economics from a master. (Stein, for those who might have missed it, played Bueller鈥檚 (Matthew Broderick鈥檚) high-school teacher in the pop hit, Ferris Bueller鈥檚 Day Off.)

But let鈥檚 switch movie metaphors for a moment. In Rain Man, autistic savant Raymond Babbitt (Dustin Hoffman) is asked two economics questions by Charlie, his money-loving younger brother (Tom Cruise).

Charlie: Raymond, how much does a candy bar cost?

Raymond: About a hundred dollars.

Charlie: Raymond, how much does an automobile cost?

Raymond: About a hundred dollars.

The questions are designed to reveal a systematic flaw in the way Raymond looks at the world. For all his skill at counting the minutia in life (like toothpicks), he just doesn鈥檛 understand the issue of scale. He doesn鈥檛 have an inherent sense of how big things are.

I鈥檝e thought a lot about Rain Man over the past few months as I鈥檝e been following the press coverage of the sub-prime mortgage crisis. The story鈥檚 been on the front page of the Wall Street Journal nearly every day. Pretty much every show on CNBC 鈥?except Kudlow %26amp; Co. and one or two others 鈥?has been obsessed with the topic. Yet no one seems to be asking the Rain Man question: 鈥淗ow big is the sub-prime mortgage market?鈥?br>

And the answer, as Ben Stein makes clear, is not very big at all.

Currently there are about 44 million mortgages in the U.S., and less than 14 percent of them are sub-prime. And only about 13 percent of those are late on payments, with the majority of late payers working through their problems with the banks.

So, all in all, when you work through the details and get down to the number that really matters, only about 0.6 percent of U.S. mortgages are currently in foreclosure. That鈥檚 up a hair from roughly 0.5 percent last year. That鈥檚 it.

Actually, that鈥檚 not it. Things are actually better than the numbers suggest, since sub-prime-mortgage homes are less expensive than prime-mortgage homes. This makes sense. Wealthier people, generally, can afford costlier homes than less-wealthy people. The recent sub-prime surge brought large numbers of moderate-income families into the home-ownership market, and their houses are less expensive than most. Therefore, the dollar impact of the sub-prime default is smaller than if it were a prime default.

With approximately 254,000 mortgages in foreclosure at the moment 鈥?up from roughly 219,000 last year 鈥?the sub-prime meltdown has given us an increase of 35,000 mortgage foreclosures over the last quarter. Since the average sub-prime mortgage clocks in at almost exactly $200,000, we鈥檙e looking at an approximate $7 billion increase in foreclosed value in the first quarter of this year.

Raymond, how big is household net worth in the U.S.? About a hundred dollars?

Actually, it鈥檚 a lot bigger than that 鈥?about $53 trillion. In other words, the recent increase in sub-prime foreclosures amounts to 0.01 percent of net U.S. household wealth.

That鈥檚 toothpicks, Raymond.