The Stock Market

Category: Finance, Real Estate.

During the last couple of weeks the Dow Jones industrial average has tanked to the tune of over 1, 000 points.

Can a tight mortgage market shoot down the whole economy, or is this issue being overblown? Many analysts reason this abrupt market downturn has been caused by a sudden increase in sub prime lending defaults. The Real Estate Bubble. During the last few years, the accelerated increase in real estate prices has been seen as unsustainable. The real estate market has had an enormous run up over the last 14 years. Many have referred to this unsustainable increase as" the real estate bubble. " Most of us who have followed the real estate trend concluded that since no financial market can continue straight up forever, this real estate bubble would someday burst.

Sub Prime Lenders Loans. Well, it looks like the real estate bubble has at long last burst. What made this particular real estate downturn so inevitable was some of the peculiar, and reckless mortgages that sub prime lenders made in the last few years. One type of reckless loan pushed by these lenders was the negative amortization mortgage. These reckless loans helped stoke the hot real estate market, but they were more prone to default than regular mortgages. With a negative amortization mortgage, a borrower gets to pay very low monthly payments for the first few years of his mortgage. Of course, most people are unable to pay this new increased payment and when they are unable to refinance or sell their houses, they default.

After the first few years, the monthly payments skyrocket to maybe 2, 3, 4 or 5 times their original, very low amount. When people start to default on their mortgages in large numbers, lenders who originated these mortgages namely sub prime lenders will be hurt financially. The Stock Market. In other words, negative amortization mortgages have come home to roost right on top of the foolish lenders who approved them! The stock market is prone to dips and sell- offs when talk of terrible financial situations abound. However in reality, it looks like economic conditions haven t changed much. The sub prime lender debacle has caused such talk.

Nothing has happened to our inflation rate, in fact, it s getting better. Interest rates are, trending downward, actually. There has been no recent increase in unemployment, and certainly the growth in the USA remains very strong. On top of these conditions, 94% of all mortgages are not in trouble. The Federal Reserve s Response. It s as if there is a black cloud hovering above the market and when news reporters look toward this cloud, all they seem to be able to find is the sub prime lender fiasco. At first, Fed Chairman Ben Bernanke, responded to the sub prime lender problem by doing nothing.

After a wild ride for the last several sessions, the Fed lowered, however the rate one- half percent on Friday, August 1 Note that lowering the discount rate doesn t always initiate a stock market rally. With the economy continuing to expand and inflation under control, usually the Fed doesn t move on the discount rate. Sometimes this move is seen as inflationary and the market reacts negatively. At first glance, you would think the market s response to the rate being lowered was emphatically positive because there was a 233- point upward move in the Dow Jones Average on Friday. So, it s hard to know for sure, where this move will lead us. However, the Dow rose, remember over 300 points on late Thursday which was before the Fed moved.

Housing slumps can certainly portend to a stock market slump. The Housing Market. When houses stop selling, there is no longer a need to build them. When the unemployment rate goes up and one segment of the economy stops making a profit, it can weigh heavily on the stock market. This puts many construction workers out of work and many construction companies in the red. So, We re Entering Into a Bear Market, Right?

It could be, with sub prime lenders out of business, mortgages may become more difficult to come by and that will add to the many reasons the housing market will stagnate for a while. It may turn out there is a bear stock market looming, but I don t believe the bull market has ended just yet. Given enough time, a slow housing market could slow the stock market. However, what s happening right now in the sub prime lender market is not cause for major concern.

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