Typically, says Max Fraad Wolff in the Asia Times, housing prices fall 30% in a downturn, over a period of about four years. If that is so, this one has a long, long way to go down. Edward Learner, director of the UCLA Anderson Forecast, makes a more modest guess; he expects new house prices to go down 5%-10% in the year ahead. The average house in Los Angeles is now valued at $510,000. That's about 50% too high, says Learner. It could take five to ten years to get prices back to normal. Meanwhile, UBS says default rates on sub-prime loans have doubled...to 8% of the total. Since 2002, more than $1 trillion in such loans have been written. And now, many of them are going sour. In October, for example, foreclosure rates in the sub-prime market were running 42% greater than the year before. And in November came news that some of the packaged securities backed by sub-prime mortgage loans were being downgraded by Moody's - barely six months after origination. Downgrades are common - mortgages go bad as people die, get divorced or go broke. But it usually takes longer than six months. Behind this news is a story that won't go away: The Financial Destruction of the American Middle Class - this is the story we've been talking about for the last three years. The plot is very simple. Most people do not work for the finance industry. Most people do not get huge bonuses. Most do not own Picassos, nor do they have houses in Aspen. Most people earn ordinary wages. And they have not had a real raise in the last 30 years. "If we use 2005 dollars and the CPI-U (consumer price index for urban consumers), average weekly earnings decreased by about $1 per week over the 30-year interval 1975-2005," writes Wolff. "The folks have thus stopped saving and have taken on massive amounts of housing and consumer debt." Wolff continues: "In 1999, total outstanding household debt was $6.4 trillion. As of the end of the second quarter of 2006 total outstanding household debt was $12.3 trillion. "Household debt has increased by almost as much since 1999 as the sum total of all debt accumulated by all households across the preceding 220-year history of the [United States]. In 1999, household mortgage debt stood at $4.4 trillion. At the close of the second quarter of 2006 it had more than doubled to $9.33 trillion. In 1999, consumer credit outstanding was measured at $1.6 trillion. "Today, this stands at approximately $2.4 trillion dollars, signaling a 50% increase in less than seven years. This is usually soft peddled and talked down by comparison to skyrocketing housing values. Household assets held as real estate increased by $9 trillion from 2000-2006. This might be called the mother of all modern bubbles. Yet household net worth struggled up by a mere $1.2 trillion. Net worth badly lags housing values because of waves of cashing out. When these waves crash ashore it will be with massive destructive force." The middle class still thinks it is the middle class. It owns one or two or three automobiles. It has children in college...a house with air-conditioning...maybe some mutual funds. But it is living on borrowed time and borrowed money...in a borrowed house. Even though house prices were rising, owners' equity as a percentage of household real estate actually fell from 58% to 54%. In other words, people 'took out' so much wealth from their houses that they ended up with a lower percentage of ownership than they had had before - even at today's high prices. As prices go down, their 'equity' will fall even further. For many homeowners, it will disappear altogether. "Americans keep refinancing and re-mortgaging. Why?" asks Wolff. "There really is only one answer: desperation. Freddie Mac informs all those who dare to look that 90% of its refinanced loans resulted in new balances at least 5% higher than the previous loan." Someday, perhaps soon, many middle class Americans are going to begin to realize that something has gone wrong. Their houses will be falling in price...while their debts are greater than ever. They will realize that they have been bamboozled.