It would be fair to say that many US investors have turned a blind eye to the continuing slump in the US housing industry: being essentially optimistic at heart, they are looking to other industries for good news, such as the media, technology and even exports.

Anything, it seems, other than the unremitting gloom from housing, which helps explain why US policymakers, from the Federal Reserve down, have consistently misread the damage the housing slump, and then the subprime mortgage debacle, is doing to the US financial markets.

This week they will receive an update with existing home sales figures for last month, the latest Standard & Poor’s Schiller Housing Price Index and new homes sales. There will also be a helpful reference point from the second update on 4th quarter Gross Domestic Product growth in the US.

The subprime crisis has enfeebled the US economy and turned Wall Street giants into blundering mendicants whose survival depends on foreigners from countries like China and the Persian Gulf.

Southern California, Florida, parts of Texas, Nevada, Utah and New Mexico have been badly hit by the housing slump, with tens of thousands of newly built homes vacant. But nowhere has it been more damaging than in parts of the old industrial states of Michigan, Ohio and Illinois.

London’s Times published a terrific feature over the weekend about the damage the subprime crisis has caused in an area known as Slavic City in the old industrial city of Cleveland, Ohio. It’s worth reading to get an idea of the scale of the scandal:

Now Slavic Village looks as if it has been hit by a hurricane. And this man-made disaster rivals hurricane Katrina when it comes to displacing families. The 2005 storm displaced some 35,000 people in the worst-hit districts of New Orleans. Since 2003 34,156 people have lost their homes to repossession in the Cleveland area, according to Case Western Reserve University, and the pace of those losses is accelerating. The new year is barely two months old and so far there have been 1,857 foreclosures in the Cleveland area.

And the feature concludes with a stunning set of statistics about the subprime mess:

  • Number of families with a sub-prime mortgage: 7.2m
  • Proportion of sub-prime mortgages in default: 14.4%
  • Sub-prime loans outstanding: $US1,300 billion
  • Sub-prime loans outstanding in 2003: $US332 billion
  • Percentage increase from 2003: 292%
  • Proportion of loans approved without fully documented income: 43%-50%
  • Number of sub-prime mortgages that will have their interest rate reset this year: 1.8m
  • Typical rise in monthly payment (third year): 30%-50%
  • Sub-prime share of all new mortgages in 2006: 28%
  • Sub-prime share of all new mortgages in 2003: 8%
  • Number of homes not in foreclosure whose value will decline in 2008-9 as sub-prime foreclosures lower the prices of surrounding homes: 45m
  • Value of that decline: $US233 billion.

And that $US233 billion in lost value is in addition to the $US150 to $US200 billion already lost by banks, mortgage originators and others. It also doesn’t include the loss of value in non-subprime homes.

The total cost is half a trillion dollars and rising, and there are still some in the US who maintain this is not as serious as previous problems in housing or finance.