So, Mr. Greenspan is issuing a warning of the housing in particular by saying:
The steep rise in the ratio of household net worth to disposable income in the mid-1990s, after a half-century of stability, is a case in point. Although the ratio fell with the collapse of equity prices in 2000, it has rebounded noticeably over the past couple of years, reflecting the rise in the prices of equities and houses.
Whether the currently elevated level of the wealth-to-income ratio will be sustained in the longer run remains to be seen. But arguably, the growing stability of the world economy over the past decade may have encouraged investors to accept increasingly lower levels of compensation for risk. They are exhibiting a seeming willingness to project stability and commit over an ever more extended time horizon.
"To some extent, those higher values may be reflecting the increased flexibility and resilience of our economy. But what they perceive as newly abundant liquidity can readily disappear. Any onset of increased investor caution elevates risk premiums and, as a consequence, lowers asset values and promotes the liquidation of the debt that supported higher prices. This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums."
Separately, I bumped into a very entertaining yet revealing earning release conference call today. (The following excerpts are courtesy of Safe Heaven. The original audio is available at Yahoo! Finance.)
- Too much risk taking will lead to a "credit event"
- Much of the volume of competitors is refinancing customers from one product to another to another to another.
- If you are going to be competitive in the business, you HAVE to have a product basket that the customer is demanding and the market is willing to provide.
- Offering these products will allow us back into these markets
- "At the point in time WHEN the credit event comes, AND IT WILL we will be very well placed to take advantage of what happens next"
- "I am concerned about the level of capital" of our competitors "to service the bonds as those portfolios age"
- "Should real estate on the west coast flatten out I would be worried about a credit event" - There are people that will buy a 100% Loan to Value (LTV). We do not have that product we do not believe in it. We want the stated income borrower to actually have some skin in the game"
- We can now offer those products but "We have no intentions of putting those loans in our portfolio... We are going to pass them thru to other investors "
- Question: and you think that is a good strategy thinking this is The Perfect Storm you are describing?
- Answer: "As long as the market is willing to provide that credit... they attempt to deliver the customer as much cash as possible with the least amount of investigation or effort...That's what drives our customer... In order to get the customers we want we need to be able to offer those products"
- Question: "Since I have known you, you have been bearish on the industry ... now you are saying I want to be more like people offering products that are unsustainable. I am struggling with that"
- Answer: "The only difference is that I do not intend to put those in my portfolio... and the day that I can't sell these (to someone else) is the day that I stop offering them".
In short, Saxon Capital, Inc., the company that hosted the conference call, is a mortgage REIT focusing n subprime/non-conforming mortgage markets. The management has been conservative in engaging in originating high loan-to-value (read: risky) mortgages, but has to follow the crowd to stay competitive. Still, they want to stay defensive by packaging and selling all these high risky products, and wait out the upcoming "Credit Event" or "Perfect Storm."
Many of you know I'm still struggling with the selling or leasing out question. Currently, I am more leaning toward my conservative roots. Anyway, no decision has been made, and for now, I'll pray that whatever the Perfect Storm, or the Credit Event, will not come in the next few months.
(P.S. I usually don't write a post that includes paragraphs of quotes, but in case you like this style, you may follow my sideline blog PFBlog Digest, a blog that captures my daily readings on personal finance, economy and investment topics.)