House prices could tumble 10 percent this year and raise the chances the United States may slip into recession unless the Federal Reserve cuts interest rates to cushion the fall in economic growth, Merrill Lynch said in research notes this week.
If correct, the prospects of this scenario will prove troubling for equities investors, who could face a stock market decline of 30 percent or more as measured by the S&P 500 index <.SPX >, the brokerage said.
Merrill said the biggest concern is that tighter lending standards in the mortgage market, even if confined to lower-quality borrowers, will constrain overall housing demand and hamper recovery in the struggling housing market.
"It is not inconceivable (given what is happening now to mortgage originations) that we end up with something closer to a 10 percent decline in home prices this year," Merrill Lynch said.
Hat tip to Chris at AmericaBlog, who adds:
So another Wall Street icon is caught up in the subprime lending bubble that is bursting and they want the Federal Reserve to cut rates to save their business. And cutting rates will do what? Encourage more bad loan deals?
Coming next: Ernie Palombo, 41, married with two children, takes a break from his second job (not as an equities investor) to explain his views on monetary policy and express his confidence that the Fed will intervene to prevent foreclosure on his sub-prime mortgage.