Signs of Hope—and Hurt

Good risks get credit again. But home sales spiral even lower


Pending home sales hit a record low.

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Lower mortgage rates, more Wall Street deals, new stock market records: On the surface, it looks as if the Federal Reserve not only calmed the credit panic but "reloaded the punch bowl with vodka," says Tom Taulli, author of The Complete M & A Handbook and longtime Wall Street observer.

Friday's report that the economy generated 110,000 jobs in September fortified optimism and sent stocks up, even though it reduced the likelihood that the Fed would spike the financial punch bowl further by cutting rates again this month.

But so far, the heady elixir of easier, cheaper money has reached only the elite: homeowners with lots of cash and firms with AAA-rated balance sheets. Imperfect consumers and businesses have been shut out of the party.

No less an eminence than former Federal Reserve Chairman Alan Greenspan says such partial improvements in the markets may not be enough to forestall a recession, which he reckons is a 33-to-50 percent likelihood.

Still, there are plenty of hopeful signs.

Rate dip. Mortgage rates for borrowers who need less than $417,000, have good credit scores, and can make big down payments have receded from this summer's peak rate of 6.8 percent to about 6.5 percent. Investors have bid top-rated mortgage bonds back to 95 cents on the dollar, up seven cents since August.

Corporations are finally finding lenders willing to fund at least some of the more sensible takeovers and solid businesses, though at higher rates. Last month was the busiest September in the nation's bond-issuing history—122 deals for a total of $105 billion, according to Thomson Financial. And lenders were inching back to the market for top-rated commercial paper—short-term corporate IOUs.

Stock investors, too, appear to be rebounding. They bought up financial shares after several big investment banks said they would take multibillion-dollar write-downs of bad debts. Tanya Azarchs of Standard & Poor's says they apparently believed executives like Citigroup CEO Charles Prince, who announced that a planned $3.3 billion charge-off for the third quarter fully accounts for all of Citi's subprime problems and still allows the bank to report a quarterly profit of at least $2 billion. Many investors feel "if that is as bad as it gets, we can live with it," Azarchs says.

Likewise, investors focused on glimmers that the housing downturn had hit bottom and drove home-builder stocks up an average of 6 percent last week. "When you begin to see the inventory numbers stabilize and the average days [a home spends] on the market stop going up, then you're pretty much at the bottom," notes real-estate economist John Tuccillo. And that's what he's seeing in markets like suburban Chicago.

Stymied. Still, it wasn't hard to find signs of worsening troubles. The National Association of Realtors reported last week that pending home sales fell 6.5 percent last month to a record low. Mortgage applications also continued their decline. "Business is just like it was after 9/11," says Colorado mortgage banker Lou Barnes. "Folks don't want to do anything right now."

And anyone looking for something other than a plain-vanilla mortgage had a hard time finding even an expensive loan. Borrowers seeking "jumbo" mortgages (over $417,000) were paying a premium of at least three fourths of a percentage point, up from a quarter point in the spring. And lenders were simply rejecting less qualified borrowers.

It was the same story on Wall Street. Bonds backed by the lowest-quality mortgages sank to new lows—some as little as 30 cents on the dollar. Lenders approved only the most profitable corporate deals. And buyout firms last week tried to squirm out of several planned takeovers.

All that leads bears like Merrill Lynch economist David Rosenberg to warn that too many investors are resting their hopes on a false bottom. The stock market's gain since the Fed's September 18 interest rate cut is just a "rally on the sugar rush of the liquidity infusion," he wrote in a recent report. "The economic background has become worse."