Kass: The Simple Math of Subprime's Slide

Quantifying the Impact of Tightening Credit

I would conservatively estimate that about 55% of the subprime borrowers, 25% of the Alt-A borrowers and 15% of the prime mortgage lending borrowers will no longer be able to secure financing for new homes because of tightened conditions. (This will produce about a 25% drop in housing demand).

Speculators and investors -- who were responsible for nearly 20% of all home purchases in 2004-06 -- also will find it more difficult to secure borrowings, and it is likely that this buying category will revert close to its historical demand role of about 5% of all homes. (This will result in another 10%-15% drop in housing demand). Finally, end-of-economic-cycle conditions (lower consumer confidence, slowing economic growth and moderating job growth) should contribute to another 10% drop in housing demand, which is as it has done historically.

Adding together the above three influences, new home demand should fall off by almost 50% (vs. the rolling 12-month average showing a 17% drop off in 2007) even before the effect of a market inundated by record foreclosures is considered.

Precipitated by the subprime mess, the entire daisy chain of home demand is deteriorating. With the first-time buyer out of the market and increased demands of higher collateral, better credit and loan documentation, the trade-up market is also in trouble. So is the Alt-A market. And, in the fullness of time, as Nouriel Roubini surmises, a more general credit crunch remains possible.