Ripples from Subprime Market Crisis Widening

The key variable driving market risk at this time continues to be the soft housing and subprime markets and their impact on wealth and consumer spending. We are seeing a decline in wealth across America as housing prices continue to fall. Lower prices translate into less material wealth and this negatively impacts the way homeowners spend, especially in regards to big-ticket items. It is clear the problems in the housing market could translate into further pressure on the mortgage and credit markets. Even the recent surprise move by the Federal Reserve in cutting the benchmark Fed Funds rate by 50 basis points to 4.75% may not be enough.

 Recent evidence continues to point to risk in the mortgage market. According to data from the Mortgage Bankers Association, the volume of people applying for mortgages declined by 2.7% for the week ended September 28. This would impact the demand for housing. In addition, the MBA composite index, a measure of the level of these applications, declined to 636.7 compared to 654.2 the previous week.

 The weakness in the mortgage market is also impacting key financial companies. Deutsche Bank Aktiengesellschaft (NYSE/DB) announced a more than nine-hundred-and-ninety- million-dollar charge in its third quarter that was associated with its subprime mortgage lending business. Dow stock Citigroup, Inc. (NYSE/C) also generated some fear after warning us to expect a 60% decline in its third quarter earnings because of its mortgage- backed securities and credit market business. Citigroup said it would absorb a $3.4-billion charge.

 The weakness in the housing market has also spread to the jobs market. The job loss in the mortgage area has been the worst among financial services companies.

 As we move forward, we expect to hear of more effects of the fragile state of the subprime market and increased credit concerns in the banking system.