Investors Worry That Mortgage Woes Will Spread
It's stomach-turning time on Wall Street again. After plummeting more than 242 points Tuesday–and 416 points on February 27–the market began another downward march Wednesday on growing fears that the troubles in the subprime mortgage sector are turning into a full-blown financial crisis. And if there's anything that Wall Street hates, it's an unexpected crisis with unknown consequences.
The Dow Jones industrial average tumbled more than 100 points shortly after noon Wednesday before rebounding, as investors began to worry that rising delinquencies in the mortgage market–which have sent the stock prices of subprime lenders tumbling–could start to affect the broader economy. To be sure, subprime lenders cater to a very specific portion of the mortgage market: borrowers with poor or troubled credit histories. But subprime borrowers aren't the only ones who are starting to fall behind on their payments.
Indeed, a recent report from the Mortgage Bankers Association showed that the delinquency rates on high-quality loans were also on the rise. And so-called serious delinquencies (loans that are 90 days or more past due or that are already in foreclosure) also jumped at the end of last year.
The fear is twofold: First, investors worry that troubles in the mortgage market mean that consumers are starting to feel a real pinch in their wallets, which means they might curtail their spending. But this could also change the willingness of banks to extend mortgages at favorable terms, which in turn could affect home prices. And up until recently, rising home values have been a critical source of wealth for American families.
"Our biggest concern is that any tightening of lending standards in the mortgage market–even if confined to lower-quality borrowers–is going to constrain overall housing demand and make it more difficult for home sales and prices to stage a recovery," says Merrill Lynch economist David Rosenberg.
Beyond the mortgage market, the sell-off that pummeled the stock prices of subprime lenders is already starting to affect the stock prices of companies in other industries. In recent days, shares of home builders, home suppliers, savings and loan companies, and regional banks have been pressured.
And now investors worry that this could spill over into the critical retail sector.
"Discounters and dollar stores could face modest head winds in the near term, as a portion of their customer base may forgo some discretionary spending to meet rising debt repayments," according to a report put out this morning by Citigroup analysts. This sentiment was reinforced earlier this week when the Commerce Department reported that retail sales came in much weaker than expected in February.
While scary, this type of market volatility is nothing unusual. According to InvesTech Research, the Dow has historically experienced a full-blown correction–defined as a drop of 10 percent or more–every year and a half or so since 1900. Yet it's been more than four years since the market has seen such a drop.
Even with today's slide, the Dow is still down only around 7 percent from its late-February peak. However, the sell-off isn't necessarily over. And the benchmark index has fallen more than 800 points in less than a month.
For the moment, market strategists are recommending that investors play some defense, by sticking with high-quality stocks, large stocks, and shares of dividend-paying companies. That's because if history is any guide, the market volatility that investors have witnessed in recent days is likely to continue.
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