If you think subprime was bad, wait until “prime” hits. The whole mortgage market mess is going to get much, much worse, according to a report in The New York Times.

The paper reports today that although the first wave of subprime mortgage defaults is peaking, a second and far more damaging wave of defaults in building - this time in the alt-A and prime mortgage brackets.

Alt-A mortgages in arrears quadrupled to 12 percent in April from a year earlier. And delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent over the same period.

If the alternate-A and prime mortgage markets collapse, it’s very bad news indeed. Since last year, Money Morning’s investment director, Keith Fitz-Gerald, has been predicting a $1-trillion total for mortgage-related writedowns - just waiting to play havoc on investor portfolios.

But that figure could be just the tip of the iceberg should alt-A and prime mortages follow subprime mortages’ lead.

Daily Pfenning editor Chuck Butler has been warning readers that the housing market has been in far worse shape than the government has been prepared to admit for some time. That’s because foreclosures are included in existing home sales data. As long as someone was living in the house when it was foreclosed, which would put the percentage very high.

Of course, the other side of the housing bust is that US houses are affordable again, as Steve Sjuggerud pointed out in DailyWealth in June.

Since last summer, the change has been extraordinary. The typical mortgage payment on the typical home in America now is 20% cheaper than it was less than a year ago. Let me explain:

Last July, the median U.S. home would have cost you about $230,000. And you’d have paid about 7% in interest on your mortgage. So that’s a $1,200 monthly mortgage payment on that house (assuming a 20% down payment).

Today, the median home price is $200,000 – a $30,000 difference from last summer. And mortgage rates are down to 6%.

Between the lower price and the lower mortgage rate, you’d be paying less than $1,000 a month on your mortgage now – for the same house that would have cost you $1,200 last summer!

And Takeover Trader editor Louis Basenese, thinks holding part of your portfolio in real estate is still a good idea, despite all the doom and gloom surrounding the sector.

Louis says waiting for a bottom is not an option because “no single data point or insider perspective is going to fortuitously signal an unambiguous bottom in the current housing market. Not new home sales… not building permits… not the latest inventory data… nothing. And nobody’s going to give us the ‘all clear,’ either.”

Waiting for irrefutable proof of the turn is flawed anyway. The stock market is a forward-looking beast. When housing prices “officially” bottom, real estate stocks will likely have already run-up in price. But there’s a surefire way not to get caught watching the paint dry…

Stick to the tried and true. Buy sound companies and have the discipline to stick to proven asset allocation. It makes all of the market indicators and posturing above pointless.

But that also means committing to owning shares of companies that are out of favor with the investing public. And no sector has been more discarded than real estate.

I suggest a low-risk, low-hassle, low-cost approach to investing in the housing market. Leave active management behind and consider the Vanguard REIT Index (MUTF:VGSIX). It will give you the broadest real estate exposure possible for an almost negligible expense ratio of 0.2%.

Public Storage and Equity Residential Properties are among its top five holdings. Both have returned over 12% this year. The fund also maintains consistent dividend strength, yielding more than 5% right now.

And here’s another little portfolio-boosting secret: This year’s big losers are often next year’s Wall Street darlings. Historical data bears that out. And so will holding a part of your portfolio in real estate.