The Effects of the Mortgage Crisis on the Stock Market

The mortgage crisis caused the Dow to plummet more than 50 percent.

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When the mortgage market melted down in 2007, it had a much broader effect than plummeting home values. As mortgages went down, they also combined with other broader economic issues to shut down credit markets and cause the stock market to lose value. Although, as of July 2013, the market as a whole has recovered from its post-mortgage crisis lows, some issues remain.

Direct Effects

Between Oct. 1 and Oct. 10, 2008, the Dow Jones Industrial Average dropped from 10,831.07 to 8,451.19. On Nov. 20, 2008, it hit 7552.29 and eventually bottomed out at 6547.05 in early March 2009. For comparison, the Dow had reached 14,000 in July 2007 before the mortgage crisis had truly hit. The broader market, as indicated by the S&P 500 index, also had similar declines. It's worth noting, though, that the stock market's problems started before the crash of the subprime mortgage market. They were also tied to the gradual decline in housing values that started in 2006 and to the economic problems that it caused.

Fear and Markets

The bigger picture is that the mortgage crisis caused a lack of confidence in the financial system and the economy. The mortgage market is a major part of global finance, and finding out that it was on shaky grounds scared investors. In addition, the loss of housing values and the inability of homeowners to pull money out of housing led to a recession that stalled corporate growth, further causing prices to plummet.

Directly Affected Industries

The mortgage crisis had specific effects on some stocks and industries. Many financial services firms either disappeared or were swallowed up in mergers at discounted prices, wiping out billions of dollars of shareholder value. Companies in the housing industry also experienced precipitous losses of value. For example, one well-regarded home builder saw its stock go from a high of $57.35 in the height of the hot housing market to a low of $13.67 in the post-crisis recession.

The Dodd-Frank Act

Although the 2010 Dodd-Frank Act didn't have quite the broad reaching effects of the Sarbanes-Oxley accounting changes passed in 2002 as a response to the Enron and Arthur Andersen scandals, it did change the regulation of many parts of the financial system. Many hedge funds fell under the supervision of the Securities and Exchange Commission, while some financial services companies lost their ability to engage in trading and managing funds for their own accounts. The ratings agencies also attracted additional government scrutiny.