Will Market, Housing Plunge Lead to Recession?
As the markets dip, a financial analyst says the bottom is yet to come.
Aug. 6, 2007 — -- The financial fallout from a deteriorating housing and lending market is flooding over into the stock market. Wall Street is bracing this morning for another day of turbulence after Friday's sell-off — the third worst one-day drop this year.
Home foreclosures are up 59 percent from last year while loan defaults continue to mount, and that has mortgage lenders zipping up their once generous coffers.
"This was a classic case of irrational exuberance," said Alan Murray, the executive editor of the Wall Street Journal. "Lenders were giving away way too much money on easy terms. People borrow too much. They bought houses they shouldn't be buying and now they are paying the price for that."
For those in the market for a new home, you can say goodbye to those easy-access, no-money-down loans so prevalent a few years ago.
There are growing concerns that trend will have a ripple effect on loans for other big-ticket items. Sales of those products have boosted consumer spending as of late.
Consumers aren't the only ones seeing the money pit dry up. Friday, a top executive at Bear Stearns, a major investment banking firm, called this the worst credit lending market he'd seen in 22 years.
The bottom line is, if there is little money to loan, consumers and companies will have little money to spend.
"You've seen housing prices fall. You see stock prices fall. People have less money, eventually that can cause the economy to slow down, less job creation. That'll really hurt people in their wallet," Murray said.
The Federal Reserve meets Tuesday and investors are hoping to hear reassuring words about the problems plaguing the markets.
But Mellody Hobson, "Good Morning America's" financial contributor, doesn't think the worst is over.
"We've gone on for nearly five years without the stock market having a 10 percent correction," Hobson said. "Those are natural and normal and we haven't had one. So even though the market has gone down quite a bit, we still aren't at 10 percent and I would expect at some point this year we'll get there."
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