Economist: Monitor Volatile Job, Housing, Mortgage Markets

On February 27, the stock market fell more than 3 percent, the biggest daily drop in over a century for the Dow Jones. Since then, markets have struggled to take back the resulting losses.

Much of this has to do with the current economic climate. For investors, as always, there is plenty to worry about. The shakedown in the subprime (bad credit mortgage) lending market has some investors worried.

Specifically, investing experts worry that this home loan crisis will further sour an already soft U.S. housing market and cause a ripple effect throughout the economy.

To top it all off, there was the cryptic statement from the Federal Open Market Committee on March 21 that have left investors puzzled about the direction of mortgage rates.

To put things in perspective, and to get an expert’s take on the market, The San Diego Daily Transcript spoke to preeminent economist Lynn Reaser, chief economist for Bank of America’s Investment Strategies Group….

SDDT: There seems to be growing fear among investors that what has happened within the [bad credit mortgage loan] market is evidence that the housing downturn has spilled over into other sectors of the economy and that it’s just the beginning of a fall-out that could spread to more sectors and swamp growth in the U.S. economy. What is your take?

LR: The subprime market has shown significant deterioration with an increase in delinquency and foreclosure rates, but the damage to the rest of the economy still seems to be very limited. There is no evidence of a widespread contagion.

SDDT: What are some conditions that could arise that could affect this outcome?

LR: A major decline in home prices could dampen consumer spending. Problems in the credit markets might also hamper the lending to consumers. Finally, ongoing major declines in home building and related industries could prolong the current softness in the overall economy.

SDDT: But it is your opinion that this scenario is unlikely?

LR: At this point, the part of the subprime market that is at greatest risk involves the adjustable-rate mortgages. Those account for about 7 percent of the total mortgage market. Outside of the adjustable rate subprime area, delinquency rates, even for fixed rate subprime loans, are still relatively low.

Although subprime borrowers are likely to see much greater difficulty in securing credit, credit availability for prime borrowers and other sectors of the economy credit is still well available.

Continue reading in the San Diego Daily Transcript …