First Houses, Now Gold?
What’s the best way to make an asset class appreciate?
A. Increase its intrinsic value
B. Limit supply
C. Increase its liquidity
D. Stimulate demand
Answer: C. (credit also given for “D.”).
Buried in a Wall Street Journal article last week (the good stuff always is) was this nugget:
Whenever an asset gets securitized, that tends to raise its price level in the short term and lower its expected returns in the long term, says William Bernstein of Efficient Frontier Advisors. The influx of new investors gives a quick boost to returns, but the sudden surge of popularity then raises prices so high that future gains are harder to sustain.
–“Gold Reigns Even on Stock Market“; The Wall Street Journal (8/23/2011)
Bernstein is discussing gold, but the phenomenon just as easily describes what happened with housing starting about a decade ago.
That’s when Wall Street started packaging mortgages in volume, getting S&P and Moody’s to slap Triple-A ratings on virtually all of it, then re-selling the paper to yield-starved investors (thanks, Chairman Greenspan!).
How did that affect the housing market?
All that “free” money sent prices to the moon.
Decades from now, when the definitive history of the early 21st century housing market boom (and subsequent bust) is written, the role of securitization — and its risks — will occupy a central role.