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|Mar 15, 2007 7:10 pm||Breaking News from MoneyNews.com||#|
|Breaking News from MoneyNews.com|
Merrill: Housing Bust to Spark Recession
The blow up in the subprime market will lead to tighter credit standards and plunging home prices which could push the U.S. economy into recession, says Merrill Lynch & Co.
New Century Financial, the second biggest subprime lender, and other lenders are on the verge of bankruptcy as defaults on mortgage payments in the subprime category have risen to a seven-year high, according to the Friedman Billings Ramsey Group. More than two dozen subprime lenders have closed or put themselves on the market since the beginning of 2006, according to Friedman.
Story continues below . . .
Overall, delinquent mortgage payments rose to a four-year high, according to a report by the Mortgage Bankers Association.
The result has been pressure from bank regulators to tighten lending standards on mortgages. Tighter lending standards, in turn, will lead to fewer home sales and falling home prices, says Merrill.
Merrill analyst David Rosenberg estimates that the subprime market boosted home sales by 20 percent annually. He says that the loss of the subprime market alone has the potential to shave a half percentage point from gross domestic product, the nation's measure of economic growth.
[Editor's Note: Yale's Shiller: Housing Prices Could Fall By 40%.]
"Even if the pullback is only aimed at the subprime market, there could well be potentially significant further drags on home prices, construction activity and of course consumer spending growth," Rosenberg said in a note to investors.
MoneyNews told readers on Monday that Bloomberg, citing economists, realtors, analysts, and a Federal Reserve governor, said Americans could face foreclosure on 1.5 million more homes, 100,000 layoffs in housing-related industries, and the collapse of another 100 mortgage firms.
The big debate is whether the trouble in the subprime market will spread to the rest of the economy. Many members of the Fed say no, but Merrill Lynch is clearly in the camp that believes the housing bust could ultimately lead to recession.
[Editor's Note: 5 Recession-Proof Stocks to Buy Now.]
Rosenberg puts the probability of a recession by the end of the year to "very close to 100 percent." That's above former Chairman Alan Greenspan's "one-third probability of recession." Rosenberg says that the plunge in home prices would impact everything from furniture and appliance sales to landscaping and the price of copper. He says this would drive unemployment to above 5 percent, resulting in a recession.
"What we are concerned about most are the knock-on effects from the pullback,'' Rosenberg said.
Rosenberg says the only way to prevent a recession from happening is if the Fed were to cut interest rates by a full percentage point. However, as MoneyNews sister publication Financial Intelligence Report has pointed out, the Fed is hamstrung when it comes to cutting interest rates. The Fed needs to keep interest rates high in order to prop up the value of the dollar by attracting foreign buying of U.S. Treasuries.
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