Morning Report - Government subsidies and the housing bubble

Vital Statistics:

	Last	Change	Percent
S&P Futures	1392.3	-5.1	-0.36%
Eurostoxx Index	2526.2	-17.3	-0.68%
Oil (WTI)	86.22	-1.0	-1.10%
LIBOR	0.311	-0.001	-0.32%
US Dollar Index (DXY)	80.53	0.125	0.16%
10 Year Govt Bond Yield	1.61%	-0.02%
RPX Composite Real Estate Index	191.3	0.5

Markets are lower this morning on no real news.  Expect stocks and bonds to be choppy as they react to every new clue about the fiscal cliff.  Harry Reid said he was "disappointed" in how the talks were going yesterday. This one will probably go down to the wire. Bonds and MBS are up.

Bob Schiller told CNBC that the possibility of the US curbing mortgage interest deductions could prompt a sea change from buying houses to renting. He is cautious on house prices:  "Persistently high unemployment and low growth in wages are reasons to be skeptical of this recovery. People that haven't recovered their economic situation yet and we have threats from abroad.  I still think it's a risky market."

To Schiller's point about people not yet recovering from their economic situation, the NY Fed has a report out on the pace of consumer de-leveraging. Aggregate consumer debt fell by .7% YOY to 11.31 trillion, which is down 11% from the peak in Q308. Still, the excesses of the housing bubble have yet to be worked off.  That said, debt service payments are at multi-decade lows, due to lower interest rates.  If you are wondering why the Fed is keeping interest rates so low for so long, this is why.  Inflation is a debtor's best friend, and that is why the Fed is so sanguine about inflation.

Chart:  Debt balance and composition:

For what it is worth, I do not share Schiller's caution.  I am bullish on residential real estate and think it will be the best performing asset in the US next year.

The Washington Post picked up on the Brown-Forman special dividend.  Expect companies with excess cash to distribute it to shareholders before taxes go up next year.

Investor's Business Daily has a good write-up on how HUD and the GSEs helped inflate the housing bubble through affordable housing goals.  They include a very interesting chart showing homeownership rates and different policy actions:  Given that the interpretation of what went wrong has fallen completely along partisan lines, this piece of the puzzle has yet to be officially examined. And explains why Franklin Raines (who ran Fannie Mae in the early 00s and instituted the American Dream Commitment) has escaped prosecution despite presiding over an accounting fraud that rivaled Enron.