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April 17, 2009 4:01 PM

Housing Jitters Grow

(CBS/AP)  Wall Street sank for a second straight session Tuesday after Federal Reserve Chairman Ben Bernanke said the slumping housing market remains a "significant drag" on the economy.

Bernanke's speech Monday night in New York elevated concerns that the summer's credit tightness might persist into the winter - a sobering thought for investors, who are sifting through mixed third-quarter earnings and watching energy costs rise.

"First of all, the worry is we're getting more bad news on housing. No. 2 is higher oil prices. That's a pretty bad combination," said Hugh Johnson, chief investment officer of Johnson Illington Advisors.

Crude oil prices spiked to another record above $88, and a National Association of Home Builders' index that tracks developers' expectations of future home sales fell for the eighth consecutive month to the lowest point since January 1985.

Also Tuesday, Treasury Secretary Henry Paulson echoed Bernanke's concerns.

"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," he said.

The ensuing uncertainty on Wall Street about the economic outlook "comes at a time when earnings results are not particularly exciting - in fact, are dismal," Johnson said.

The administration's main solution to the housing decline is to pressure the nation's mortgage lenders to ease up on foreclosures, reports CBS News correspondent Wyatt Andrews.

The initiative, called Hope Now, hopes to find the estimated 1 million or so homeowners facing sharp increases in their adjustable rate mortgages.

Ray Dawkins is one such homeowner. A community group called Acorn is pushing Dawkins' lender to refinance.

"It's scary to think what will happen," said Dawkins. "The ultimate thing that will happen is foreclosure."

Under Hope Now, 13 of the nation's largest lenders have agreed to try refinancing instead of foreclosures, reports Andrews.

"With a refinancing program we'll have fewer houses for sale," said Peter Morici, a business professor at the University of Maryland. "That'll put a floor under the housing market, where it should be, and restore confidence in the values of people's homes."

Meanwhile, a day after Citigroup Inc. reported a steep third-quarter profit decline and announced plans with a consortium of banks to set up a fund to help bail out the credit markets, two more banks released disappointing results.

Wells Fargo & Co. shares fell 4 percent after the bank said third-quarter earnings increased by less than analysts anticipated and that it boosted loan loss reserves in preparation for more problems in consumer credit. KeyCorp shares declined nearly 6 percent after the Midwest regional bank posted a 33 percent drop in third-quarter profit.

According to preliminary calculations, the Dow Jones industrial average fell 71.86, or 0.51 percent, to 13,912.94, after falling more than 100 points earlier in the session.

Broader indicators also declined. The Standard & Poor's 500 index slid 10.18, or 0.66 percent, to 1,538.53, and the Nasdaq composite index dipped 16.14, or 0.58 percent, to 2,763.91.

Bond prices rose as investors pulled money out of stocks. The yield on the 10-year Treasury note, which moves inversely to the price, fell to 4.66 percent from 4.68 percent at Monday's close.

The dollar rose against most currencies. Gold also rose.

On Monday, the Dow and the S&P posted their biggest point drops in five weeks; just last week, the two indexes had touched record highs.

"The relief rally that we've enjoyed since Aug. 16, the day before the Fed cut the discount rate, has been an impressive one. And it will probably still push stock prices higher the rest of the year," said Edward Yardeni, an economist who runs Yardeni Research in Great Neck, N.Y.

But, he added, "the first batch of earnings news for the third quarter gives some reason for concern, particularly for the banks, who are probably going to continue to have problems with their own portfolios."

Bernanke said Monday night the deepening housing slump will probably keep dragging on economic growth, but he again pledged to "act as needed" to help financial markets that seized up this summer. He also said inflation remains in check - which could convince policymakers to cut interest rates for the second month in a row at their Oct. 30-31 meeting.

But while core inflation - which excludes volatile food and energy prices - is mild, oil prices are pushing further into uncharted territory on speculation about supply disruptions.

Crude futures rose $1.48 to a record close of $87.61 a barrel on the New York Mercantile Exchange, after briefly surpassing $88.

Declining issues outnumbered advancers by about 8 to 3 on the New York Stock Exchange. Volume came to 1.29 million shares.

Most financial and housing-related stocks fell, as did retailers.

A couple bright spots in the financial sector were State Street Corp., a trust bank that posted a profit rise of 29 percent on strong revenue from servicing fees and trading services, and Bear Stearns Cos. A bank owned by the investment arm of China's cabinet is planning a bid for a stake in the brokerage.

State Street rose $5.75, or 8.3 percent, to $74.68.

Bear Stearns rose $2.36, or 2 percent, to $123.05.

Overseas, Japan's Nikkei stock average fell 1.27 percent and Hong Kong's Hang Seng index fell 1.98 percent. Britain's FTSE 100 fell 0.45 percent, Germany's DAX index fell 0.09 percent, and France's CAC-40 fell 0.57 percent.

© 2009 CBS Interactive Inc. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.
Add a Comment See all 36 Comments
by mediapreachr October 17, 2007 7:24 AM EDT
Anyone here watch The Tonight Show?
Some jokes for the emerging brave new US economy:
-best new jobs-Repo man.
-worst job-mortgage loan consultant.
What''s coming is pretty bad so you have two basic choices,make fun about your situation or,as the french says "sauve qui peut".
Reply to this comment
by danstoned October 17, 2007 5:08 AM EDT
VOTE with yer head up urASS:

VOTE jinGOPig: americas false hope?
Reply to this comment
by ubrew12 October 17, 2007 4:39 AM EDT
Recessions always start with the poor and middle-class, and end with the poor and middle-class.

The rich suffer the least from recessions. But the suffering of those just entering the housing market is a harbinger of a true recession. I hope it hits before Bush leaves office so we know who to assign blame to.
Reply to this comment
by dubephnx October 17, 2007 4:23 AM EDT
Which costs more; A defaulted mortgage picked up by the next buyer, or a defaulted mortgage because the home was destroyed by fire, tornado, hurricane, earthquake, terrorist attack, flooding , tsunamis, etc? Someone has to pay for the rebuild, and that costs a lot of money, that lenders and investors lose on twice! One building collapse takes about 5,000 new building loans to make up the difference.

Lets get to the core problems and address what is making lenders, insurers, economists, building owners and residents lose trust in this market! All buildings, from homes to highrises, are suppose to last a 100 years, and hurricane Katrina and other disasters have proven to the public majority that they don''t last that long!
Reply to this comment
by condumism October 17, 2007 3:30 AM EDT
Year 2000: 1 US dollar = .90 Euro
Year 2007: 1 US dollar = 1.41 Euro

The difference in exchange rates in 7 years is that the dollar is now backed by DEBT! NO ASSETS! Just US CORPORATE AMERICA LIES, and nothing more!
Reply to this comment
by rev0lution October 17, 2007 3:23 AM EDT
****** FEDERAL RESERVE SCAM ******
Ron Paul Goes Head To Head With Bernanke "Federal Reserve" Explaining Why Our Economy Is So Poor! Watch This Video America So You Can Understand Your Own Dollar And The Hidden Inflation Tax!

WATCH THIS VIDEO:
http://***********/345s6g

Ron Paul Is America''s Last Hope! Wake Up America Before It Is All Gone!

*************************
VOTE RON PAUL 2008
*************************
Reply to this comment
by mcv57 October 17, 2007 2:36 AM EDT
Since the end of the Gold Standard, there was nothing the Government held value to the U.S. dollar. Realtors and morgage companies would have you believe to invest land and houses to create wealth, but that was a lie. The real truth: the value of the dollar was staring you right in the face, but you keep pump it in your SUV - as the dollar goes down; the price of oil goes up!
Reply to this comment
by neobrian-2009 October 17, 2007 2:31 AM EDT
If you own a small business,one of your main customers could kill your finances,..Maybe they write you a bad check ,...or go bankrupt or are very slow-paying,..What happens to your finances then ?You people who are So Quick to judge should consider that not all people are in financial trouble ,because they took out loans they could not afford.There`s many factors here,...truckers are bearing the brunt of high fuel,..small business people are Not getting paid.
Some of you think you know everything,..start calling others names,when actually you don`t have a clue of what`s going on in the real world.
Reply to this comment
by condumism October 17, 2007 2:19 AM EDT
Posted by ohiochili at 07:47 PM : Oct 16, 2007

In my humble opinion, if you dont have enough to replace your roof and make your mortgage payment, you have no business buying that house.

Do you support a bailout of the US banking industry because of Alan Greenspans bad decisions to reduce interest rates to 0.5% ? It seems to me that your mortgage businesses bad decisions to loan money to idiots is why the US housing market is in such dire straits. I hate Corporate America, or US capitalism as we now know it! Greed always ends up costing all of US for in a federally mandated bailout for few bad business decisions. I say: EATSHIT MOPRTGAGE COMPANIES!
Reply to this comment
by condumism October 17, 2007 2:04 AM EDT
Posted by tylenol6
Anyone who does vote for Hitlery is a complete moron.

Your Repiglicon candidate will always be a Repiglicon, thus ZERO CHANCE of ever becoming president of the Fascist States of America.

Hitlery? Sounds similar to Hitler. Any other reason why you would compare a democrat to a Nazi? Or are you now just name calling because your desperate rant for Ron Pauls failed candadicy has proven ypu to be an extremist jinGOpig? How bout you dont vote, and instead, moveon? Too funny!

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