Housing and Subprime Side Effects Not Over Yet

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 bigger ticket items. It is clear that the problems in the housing market could translate into further pressure on the mortgage and credit markets. Even the recent moves by the Federal Reserve in cutting the benchmark Fed Fund rate by a total of 75 basis points to 4.50% may not be enough.

 Recent evidence continues to point to risk in the housing market. On Thursday, data were released by the National Association of Realtors that pointed to a decline in the sales of existing homes for the eighth straight month in October. In addition, median home prices declined by a record amount of 5.1% year-over-year to $207,800. The decline in the housing data was attributed to the credit issues and speculation that any worsening could drive the U.S. into a recession.

 The impact on financial companies has been clear. The last week saw Citigroup, Inc. (NYSE/C) announcing additional write-offs, bringing the total to over $11.0 billion in losses related to the housing and subprime problems. Wells Fargo & Company (NYSE/WFC) also said it would write down $1.4 billion in losses on home equity loans for the fourth quarter. WFC has about $11.9 billion in high-risk home equity loans representing about 14% of the company’s total home equity portfolio of $83.4 billion.

 The weakness in the housing market has also spread to the jobs market. The job losses in the mortgage area have been the worst among financial services companies. Citigroup announced massive job losses that could swell up to 45,000 additional cuts or over 10% of its global workforce in order to pare down expenses.

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