See, the housing pyramid was very simple: Buy a house beyond your means. It’s okay if you can’t afford the monthly payments because you simply sell the house for a profit in a year or two. With lots of people doing the same thing, house prices were guaranteed to go up faster than most Americans could afford.

“You don’t mind making a $2,000 payment when the house is going up” in value, said Steve Walsh, a mortgage broker in Scottsdale, Arizona, who has seen several clients walk away from their homes because they couldn’t refinance or sell. “When it’s going down, it becomes a weight around your neck, it becomes an anchor.”

No one wants to hear this, but the housing market in this country has become a massive pyramid scheme. If you need any proof, read this quote from The New York Times :

The irony? I didn’t even know what a pyramid scheme was! It just seemed like the right descriptive words.

When I was a teenager, a relative of mine was excited about joining an “investment club” in which members passed $5,000 up the chain to higher-level members. Each member, who kept a percentage of the money moving up the ladder, had to recruit more people to keep feeding the system.

But the market moves at a glacial pace compared with other financial scams, so it seemed safer. My favorite argument: “You can live in this investment.” Um, yeah.

With such a cultural mentality, it became difficult for individuals to recognize that such an investment scheme couldn’t go on forever. It turned out a credit crunch stopped the game because suddenly the players could no longer sell or refinance their overpriced homes.

Financial pyramid schemes, like the one I mentioned at the beginning of this post, are pretty easy to spot because they explode in size overnight and collapse even quicker. Those at the bottom usually complain first.

Investigators then prosecute those at the top, but the transfer of wealth tends to be permanent. Damage occurs from top to bottom of they pyramid, though those at the top tend to fair much better – as long as they escape prosecution – than those at the bottom.

So here we have the housing market collapsing in slow motion just like a financial pyramid scheme. First came subprime, the bottom part of the pyramid. Next comes the middle portion of the pyramid, which mean option-ARMS and Alt-A. Then comes prime mortgages. The wealthy are better situated to weather the collapse because they have more resources to begin with.

Writes the Times:

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists. The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one. … “This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

The delinquency rate for all mortgages is at 7.3 percent, which is at the highest rate since 1979 when such numbers were tracked, according to the Times. At the end of September, 4 percent of prime mortgages were past due.

Delinquency rates aren’t quite so high at Fannie Mae, according to the company’s monthly report (pdf), but the number of seriously delinquent homeowners has been consistently rising since mid-2007. (see chart.)

Because the pyramid is eroding from the base first, it’s hard for those still doing well to see what is happening under their feet. Most of those who hold prime mortgages still have jobs and have deep enough pockets to hang on longer than those with subprime mortgages.

The question becomes: How long will the Middle Class hang on? It’s hard to say. Economists seem to have forgotten that recessions don’t occur in a straight line down. Instead, the economy stair-steps its way into the basement.

Interestingly, the pyramid may still be growing at the top. Even in Los Angeles, where median listing prices have dropped to $475,000, some zip codes are seeing home values increase. Just take a look at the map on L.A. Land, a Los Angeles Times real estate blog. Of course, the numbers come from Zillow, so it’s hard to know how accurate they are.

I’m of the opinion, though, that the pyramid, because of its massive size, will continue to crumble from the underside until the damage is across the board. But don’t believe me, look at what lenders are doing, according to the Los Angeles Times:

6 Firms Act to Help Avert Foreclosures

The mortgage lenders will team up with nonprofits to reach out to borrowers at risk. Struggling to connect with their delinquent customers, a group of six major mortgage lenders is teaming up with nonprofit groups to serve as a go-between. As part of the program, borrowers who get behind on their payments will receive notice from a financial counseling service “instead of the big, bad bank,” said an executive with one of the lenders.

Hmm, think these lenders are satisfied that write-downs are coming to an end? Hah!

Besides, this latest scheme comes on top of the other bailouts such as: Fed Rate Cuts, tax cuts, stimulus packages, mortgage rate-freezes and a plan to allow Fannie Mae to buy crappy mortgages from other financial institutions.

In case you’re wondering, I suspect our esteemed leaders understand what is happening; the fight is over who should take the biggest hit from the mess that is being created. The goal seems to be this: save the financial institutions, screw the homeowners and/or shift as much of the pain into the future through more deficit spending and cheap credit.

The best part? The seeds – such as the Fed making credit dirt cheap to banks – for the next big pyramid scheme are being planted today so we can do it all over again in the future. Odds are that in 20 years or so, a new pyramid will have been built and everyone will be shocked and surprised.