This has been one of the worst weeks for the Dow Jones for 4 years – the stock market fell 4.2% this week. In particular brokers are becoming more wary of buying risky assets.. In part this stems from worries over the US housing market’s sub prime market. This is basically lending mortgages to people with bad credit histories. These kinds of loans are more risky, but in the past house prices rose rapidly in the US. Now that house prices in the US are falling, there are increasing concerns that this kind of mortgage lending is too risky. Therefore the risk premium of insuring such mortgages has increased significantly.
Some brokers fear the worst for the stock markets is over. But the big question is whether falling house prices could tip the US economy into recession.