The Subprime Primer

Click here to view my all-time favorite explanation of the key issues behind the sub-prime crisis as told in the form of cartoon slideshow. It is accurate and quite funny -- but do not read if you are offended by brutal honesty!

I'm passing this along to you after spending the weekend in Savannah, Georgia, to deliver a presentation at the Association of Millwork Distributors’ 2008 Top Management Leadership Conference.

Like distributors of other building materials, this group has been hard hit by the residential construction downturn. I presented some data from my 2008 Wholesale Distribution Economic Reports. We then spent time talking about the origins of the sub-prime crisis and when housing will start to grow again.

I’ve argued for some time that this mess will infect the whole economy so you should take a few minutes to understand what’s going on.

For a more sober (and less profane) analysis, Monday’s Wall Street Journal has “Economy May Face Prolonged Pain, History Suggests.” The article has the following concise summary of the housing situation:

“For several years, U.S. home prices and home construction kept climbing past levels considered sustainable. Homes became collateral for trillions of dollars in borrowing. That depressed savings, inflated consumption, fueled rapid lending and loosened loan standards. When home prices stopped rising, the diciest mortgages began to default, triggering the crisis.”

Rather than being burned again, lenders are becoming more risk averse and tightening mortgage lending standards. But the horse got out, so locking the barn door won’t fix the current mess.

Hat tip to Greg Mankiw’s blog for pointing me to The Sub-prime Primer. (Note that my version has less profanity than the original.)