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5 "Tells" that the Stock Markets Are About to Reverse

US Subprime Mortgages Fallout and Declining Housing Market likely to hit the Stock Market

Housing-Market / Analysis & Strategy Feb 27, 2007 - 12:55 AM GMT

By: Nadeem_Walayat

Housing-Market

The continuing fallout from subprime mortgages is starting to weigh on the Stock Market as the consequences of failures continue to ripple out into the financial and home building market sectors. Already sharp sell offs have occurred in the shares of subprime lenders such as New Century Financial Corp, falling by more than 40% in less than a week. As well as major banks such as HSBC issuing statements on the impact of defaults.

US Subprime Mortgages fallout and Declining Housing Market likely to hit the Stock Market


The market has yet to fully realise the size and extent of the impact of more than a trillion dollars of subprime mortgage debt at risk of default, especially as the US housing market continues to tumble lower which is forcing more subprime mortgage holders into negative equity, and foreclosure. The subprime sector is now well on the path to a crash, the only question is when will it take the rest of the Stock Market and the economy down with it.

Over 20% of mortgages are of the subprime category with the expectation that as many as 25% of these loans are likely to end in foreclosure in the face of further falls in the housing market. This could significantly worsen the situation if further rises in interest rates were forced onto the Federal Reserve, to curb inflationary pressures brought about by a falling dollar due to the twin deficits, exacerbated by the recent switch to negative investment flows.

Crude oil is showing all the signs of re-igniting its bull market, having made a bottom in mid January. Should crude oil rally back to above $70 then worries will again shift to inflation and rate rises.

The main beneficiary of the subprime fallout is the bond market, which has already staged a rally from lows set in late January, this despite a weakening US Dollar on expectations that the falling housing market and expectations of defaults levels of up to 25% could tip the US into recession later by the end of 2007. These fears were earlier discussed on Monday by former Fed Chairman, Alan Greenspan who in answering a question on the US economy stated " it was possible that it would go into recession by the last few months of 2007".

By Nadeem Walayat

(c) MarketOracle.co.uk 2007


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