Credit Crunch Fears Back On Housing, Fin'l Firms' Outlooks

September housing starts dived 10.2% to an annual rate of 1.191 million, a 14-year low, the Commerce Department said Wednesday. Permits for future building slumped. Economists don't see any sign that the drop will end soon, and some see it intensifying in the coming months.

Along with other gloomy corporate and economic data, the report sent markets reeling.

The Dow fell deep into the red, as the blue-chip index fought back to be down just 0.1%.

A late rebound pushed the Nasdaq to a 1% gain, recouping most of its early earnings-driven rally.

At the same time, investors rushed into Treasuries on rising hope for a Fed rate cut. The benchmark 10-year yield fell 8 basis points to 4.57%. Short-term yields sank even more.

"Housing market concerns continue to spread," said Peter Boockvar, an equities analyst at Miller Tabak.

A host of earnings reports reinforced that credit woes aren't going away anytime soon.

Mortgage insurers are now feeling the pinch of several years of reckless lending.

MGIC Investment Corp. (NYSE: - ), the nation's biggest mortgage insurer, warned that it wouldn't turn a profit in 2008, as foreclosures of U.S. homes surge beyond expectations and lenders look for a bailout.

MGIC also posted a loss of $4.60 a share, its first quarterly loss in 16 years and the company's worst ever. Fitch said it may downgrade MGIC's ability to pay claims because of its dismal performance in loans made this year.

On a related note, Standard & Poor's downgraded a fresh batch of mortgage-backed securities based on riskier Alt-A mortgages issued in the first half of the year.

Troubled jumbo lender Thornburg Mortgage (NYSE: - ) saw shares tumble again after announcing late Tuesday a $1 billion third-quarter loss and saying it would halt dividends.

Meanwhile, Citigroup (NYSE: - ) shares fell to a two-year low, extending losses. On Monday, the financial giant gave a gloomy outlook and confirmed plans for a bank superfund with JPMorgan (NYSE: - ) and Bank of America (NYSE: - ). Critics say it's a bailout for Citi's off-balance-sheet mortgage holdings. Citi's shares did rally to almost flat.

Meantime, mortgage lender Washington Mutual (NYSE: - ) said after Wednesday's close that net income fell 72% in the quarter, worse than forecast.

That follows poor results from Wells Fargo (NYSE: - ), KeyCorp (NYSE: - ) and U.S. Bancorp (NYSE: - ) on Tuesday.

Housing-inspired financial sector troubles are also showing up in other areas.

IBM's (NYSE: - ) third-quarter earnings disappointed, in part because big financial services firms held off on new hardware and software purchases.

"IBM proves (the credit crunch) is beginning to spread to technology budgets," Boockvar said.

Not all the news was bad.

Yahoo (NasdaqGS: - ), Intel (NasdaqGS: - ) and Coca-Cola (NYSE: - ) posted solid third-quarter results.

JPMorgan shares climbed 3.5% after it managed to edge out a profit, despite a $1.3 billion write-down due to credit and mortgage market turmoil and a cautious outlook.

After the close, eBay (NasdaqGS: - ) topped third-quarter views and guided fourth-quarter estimates higher. Shares jumped late initially but gains faded.

Oil prices continued to soar. Crude topped $89 a barrel intraday, though it closed down 21 cents to $87.40. Retail gasoline and heating costs are likely to jump in the coming weeks.

The Fed's beige book report said growth has "decelerated since August." The roundup of anecdotal reports from regional banks also saw "higher than usual" uncertainty, slower growth and tighter lending standards.

Stocks began their afternoon rally after the beige book's 2 p.m. release.

The report gives central bankers more incentive to continue cutting interest rates after an initial 50-basis-point 13ove on Sept. 18.

Consumer inflation data also were tame. The September CPI rose 0.3%, but core prices excluding food and energy climbed just 0.2%.

Fed funds futures put the odds of a quarter-point 18ate cut this month at 54%, up from 39% on Tuesday.