Economy Shows New Signs Of Stress

The $2.2 billion loss posted by Merrill Lynch yesterday was far worse than what it forecast less than three weeks ago. The investment firm said it had to write down mortgage-backed assets by $7.9 billion, revised from an earlier estimate of $4.5 billion. Some investors saw it as a sign that the financial industry still may not have a full grip on problems related to risky, subprime loans.

"We got it wrong," Merrill's chairman and chief executive, E. Stanley O'Neal, said in a conference call with investment analysts. "We made a mistake. There were some errors of judgment made in the business itself and in the risk-management function."

O'Neal left the door open to further write-downs, saying the firm expected "market conditions for subprime mortgage-related assets to continue to be uncertain."

The National Association of Realtors reported that sales of existing single-family houses, townhouses, condominiums and co-ops declined 8 percent in September from August, to a seasonally adjusted rate of 5.04 million units. The pace is the lowest since the association began tracking such data in 1999. Sales were down 19.1 percent compared with September 2006.

The numbers reflect that home buyers continue to struggle to secure loans, especially those worth more than $417,000, as lenders tighten standards and increase costs for the larger loans, analysts said. The decline was expected to bleed into October and to be reflected in new-home sales figures scheduled to be released today. The association also reported that the housing inventory had increased and that median prices declined.

Combined with new data about flagging existing-home sales, Merrill Lynch's disclosure pushed U.S. markets sharply lower, though the major indicators regained most of their losses in the final hour of trading. Late-day rallies have been common in the past few months of volatile trading sessions.

The Dow Jones industrial average ended the day down less than a point, to 13,675.25. The broader Standard & Poor's 500-stock index fell 3.71 points, to 1515.88. The tech-heavy Nasdaq composite index fell 24.5 points, to 2774.76.

The turbulent market has spurred growing concern in Congress and forced lenders to curb the subprime loans that have been the subject of most of the recent foreclosures. Earlier this week, Countrywide Financial, the nation's largest mortgage lender, announced it would refinance or modify up to $16 billion in home loans through the end of 2008, including 52,000 subprime borrowers.

"I can't see a light at the end of the tunnel for declining home sales," said Stuart G. Hoffman, chief economist for PNC Financial Services Group in Pittsburgh. "Before we hit bottom, which may not be until next spring or summer, [the market] is going to be down another 5 to 10 percent from where we are now."

"Housing is a black hole, but it hasn't quite sucked in the energy of the rest of the economy," Hoffman said. "But my forecast is that when we close the books on this holiday season, this is not a holiday [retailers] are going to remember very fondly, probably the least profitable since 2001, 2002."

Staff writer Renae Merle contributed to this report.