April existing home sales slip; inventory surges

We just got April existing home sales data from the National Association of Realtors. Here's what the numbers looked like ...

* Sales dropped 1% to a seasonally adjusted annual rate of 4.89 million in April from 4.94 million in March (previously reported as 4.93 million). That was a bit better than the forecast of 4.85 million home sales. Sales were down 17.5% from the year earlier reading of 5.93 million, and they matched the cycle (and record) low of 4.89 million units in January.

* By region, sales dropped 4.4% in the Northeast and 6% in the Midwest. Sales were unchanged in the South and up 6.4% in the West. By property type, sales dropped 0.5% in the single-family market and 5.2% in the condo arena.

* The supply of homes for sale shot up 10.5% to 4.552 million units in April from 4.118 million in March (previously reported as 4.058 million) and 4.22 million a year earlier. The absolute number of homes for sale is just shy of the 4.561 million peak, set last July. Single-family home only inventory rose to 3.9 million homes, the highest I can find on record (my data goes back to 1982 -- chart above).

On a months supply at current sales pace basis, inventory jumped to 11.2 months from 10 months in March (previously reported as 9.9) and 8.5 a year earlier. That is a new record, though the data for SFH+condos+coops only goes back to 1999. The SFH-only data (10.7 months) shows this is the most oversupplied the market has been since 1985.

* Median home prices rose 1.1% to $202,300 in April from $200,100 in March (previously reported as $200,000). They fell 8% from $219,900 a year earlier, however, the eighth month in a row of year-over-year declines.

The headline writers are probably having a tough time coming up with new ways to say "The housing market stinks." But that's clearly what the latest numbers show. Home sales dipped again in April. Home prices took the eighth year-over-year tumble in a row. Most importantly, the inventory of homes for sale surged. We're now the most oversupplied since the mid-1980s.

The only way we're going to clear this supply glut is through lower prices. Some markets -- specifically, those with the most aggressive price cutting going on -- appear to be making some progress on the inventory front. Traditional sellers, lenders loaded down with REO property, and home builders in those markets are doing what they need to do to attract buyers. Others aren't making as much progress because sellers there are just too stubborn.

Bottom line: The 2008 spring selling season will go down in the books as another disappointing one, just as I expected.

Global corporate bond defaults on the rise

Many risk spreads have narrowed since the Fed-organized bailout of Bear Stearns. But we're seeing some signs of renewed, minor turbulence in the corporate bond market. One reason? Defaults are rising. There have already been more global defaults this year than we had in all of 2007. More details in this excerpt from Bloomberg:

"Credit-default swaps on the Markit iTraxx Europe index of 125 companies with investment-grade ratings rose 4.25 basis points to 84.5 as of 11:48 a.m. in London trading, according to JPMorgan Chase & Co. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 15 basis points to 461, JPMorgan prices show.

"Defaults by Tropicana LLC, the Atlantic City casino operator, and U.S. housewares retailer Linens 'n Things Inc. helped push this year's total to 28, compared with 22 borrowers that missed payments in all of 2007, Standard & Poor's said in a report yesterday. The global default rate will rise to 4.7 percent in the next 12 months from a 25-year low of 0.97 percent at the end of 2007, according to S&P. The average since 1981 is about 4.35 percent."

WSJ and home builder incentives

The Wall Street Journal covers the aggressive, renewed use of incentives by new home builders. An excerpt:

"Highlighting their desperation to sell houses, builders are bringing back the gimmicks -- mortgage rates that start low, help with down payments, zero out-of-pocket expenses -- that helped fuel the housing bubble before it went bust.

"But this time, they say, history won't repeat itself.

"This weekend, Lennar Corp., the nation's largest builder by revenue, will start interest rates at 2.88% for the first year -- 3.88% for the second -- before a slightly higher rate locks "for life." In some markets, Ryland Group Inc. will cover the down payment and closing costs, while KB Home has zero-down deals. Hovnanian Enterprises Inc., meanwhile, also is helping buyers secure down payments, and its mortgage subsidiary eliminated loan closing fees.

"Builders, trying to survive the worst downturn since the Depression, must move inventory quickly to bring in cash: Stung by eroding land and house values that show no sign of stabilizing, the nation's top builders have racked up more than $24 billion in impairment charges, according to Standard & Poor's.

"Builders acknowledge things are tough, but they promise they are being responsible: To keep people out of houses they can't afford, they are scrutinizing income and credit scores and making sure loans don't reset with unbearable payments."

I would argue that the incentives never really went away. I've seen builders continue to offer all kinds of sweeteners to drive traffic. It's worth noting that the fine print (and sometimes, the big print) in advertisements has shifted. Many offers are dependent on the ability of the borrower to obtain FHA financing, rather than private mortgages. Some deals assume the involvement of down payment assistance programs, which are somewhat controversial in their own right.

For example, here is the disclaimer language from an offer being touted in my neck of the woods:

"$0 down offer assumes buyer will qualify to obtain down payment from a non-profit down payment assistance program. Funds to cover closing costs paid by seller as defined on your good faith estimate, are subject to seller contribution limits and do not include prepaids. Offers, incentives and seller contributions are subject to certain terms, conditions and restrictions and are available only to qualified buyers financing through Universal American Mortgage Company and closing with designated closing agents. Lennar reserves the right to change or withdraw any offer at any time. $0 down/$0 closing costs offer is only good on inventory homes that sell and close by 5/30/08 and can only be used with FHA loans."

10-year yields moving higher; TIPS spread widening out

There's some interesting bond market action worth noting today: The yield on the benchmark 10-year Treasury Note is pushing the top end of its recent range, recently at 3.92%. We've also seen the 10-year TIPS spread widen out. It's the difference between yields on nominal 10-year Treasury Notes and yields on 10-year Treasury Inflation Protected Securities, and it's a key market-based indicator of inflation concern. The spread was recently just above 256 basis points, the highest going all the way back to August 2006. I continue to believe that a sharp break in bond prices (and a sharp rise in interest rates) is a key risk going forward.

UPDATE: Treasuries continue to sell off late in the day, with 10-year yields pushing 3.94% at last count. Meanwhile, I had a chance to check out Bill Gross' latest commentary, which is focused on the striking difference between our CPI figures and the inflation figures being reported around the world. It's nothing new to see bureaucrats get savaged about the accuracy of CPI data -- data that doesn't really reflect what we as Americans see in our daily lives. But it's notable to see this kind of critique coming from a guy who oversees the world's largest bond investment firm.

Thoughts on oil prices, demand destruction, and the role of the Fed

Demand destruction is the fancy economic term for what happens when the price of a commodity (in today's case, oil) gets too high. Once the price goes up so much, users can no longer afford the cost. They find ways to conserve and cut back on oil usage. This destroys demand for the commodity, and prices collapse.

I got to thinking about this topic after reading the following New York Times story on American Airlines. Is this a sign that high prices are starting to destroy demand (by driving fares out of reach of U.S. consumers, by forcing airlines to cut capacity -- thereby reducing demand for jet fuel, and so on)?

"American Airlines, the nation’s largest air carrier, said Wednesday that it would begin charging $15 for many passengers to check their first bag, eliminating a free service that passengers in the United States have come to expect during the modern jet era.

"American made its announcement during the annual meeting held by its parent company, the AMR Corporation, in Fort Worth.

"At the same time, American said it would take up to 85 aircraft out of its fleet, including jets and commuter planes, by the end of the year, one of the biggest cutbacks since the airlines culled their fleets after the September 2001 attacks. American has about 960 aircraft at the mainline airline and its American Eagle subsidiary.

"The reductions will translate to an 11 to 12 percent cut in service during the fourth quarter, American officials said. They said the airline would eliminate some jobs, but did not give specifics."

Speaking of oil prices, here is what Bloomberg had to say about the latest surge in oil prices (crude was recently up more than $3.20 a barrel to $132 and change) ...

"Crude oil rose to a record above $132 a barrel as U.S. stockpiles unexpectedly dropped and banks raised price forecasts because of supply constraints and demand growth.

"Supplies fell 5.32 million barrels to 320.4 million last week, the biggest drop in four months, the Energy Department said. Oil for December 2016 delivery rose more than $19 a barrel, or 16 percent, after Goldman Sachs Group Inc. on May 16 raised its outlook to $141 a barrel for the second-half of the year.

"What we have here is a situation where essentially higher prices aren't generating any more supply," Paul Sankey, an analyst at Deutsche Bank Securities in New York said in an interview with Bloomberg radio. "What we have to do is keep pricing the commodity higher until demand starts falling,'' which "is around $150 a barrel.''

"Crude oil for July delivery rose $2.53, or 2 percent, to $131.51 a barrel at 12:27 p.m. on the New York Mercantile Exchange, after reaching $132.08. Prices have almost doubled from a year ago."

My personal take, for what it's worth, is that a fundamentally strong market is now morphing into just the latest in a series of speculative bubbles. Lots of forces have been driving oil prices higher for the past few years. But we are now making the boom-to-bubble transition thanks, in part, to our friends at the Federal Reserve.

They threw easy money at the dot-com bust, creating the monetary conditions necessary for a housing bubble. In the past several months, they have been throwing easy money and rate cuts at the housing bust. That has now poured monetary gasoline onto an already red-hot fire in oil and other commodities. In other words, the Fed is accomodating the rise in commodities prices -- just like it did in the 1970s -- and the result is the miserable version of Stagflation-lite we have today.

Vice Chairman Kohn tried to play down this version of events yesterday, saying the following:

"Some observers have questioned whether the news on fundamentals affecting supply and demand in commodities markets has been sufficient to justify the sharp price increases in recent months. Some of these commentators have cited the actions of the Federal Reserve in reducing interest rates as an important consideration boosting commodity prices. To be sure, commodity prices did rise as interest rates fell. However, for many commodities, inventories have fallen to all-time lows, a development that casts doubt on the premise that speculative demand boosted by low interest rates has pushed prices above levels that would be consistent with the fundamentals of supply and demand. As interest rates in the United States fell relative to those abroad, the dollar declined, which could have boosted the prices of commodities commonly priced in dollars by reducing their cost in terms of other currencies, hence raising the amount demanded by people using those currencies. But the prices of commodities have risen substantially in terms of all currencies, not just the dollar. In sum, lower interest rates and the reduced foreign exchange value of the dollar may have played a role in the rise in the prices of oil and other commodities, but it probably has been a small one."

But I don't agree. You simply can't run a persistently negative interest rate policy without consequences. You simply can't keep bailing out the last round of speculators without emboldening the next round. Yet here we sit, with a 2% nominal funds rate and a 3.9% year-over-year rate of CPI inflation, and the Fed doggedly pursuing its "Trash for Treasuries" policy.

Anyway, some more thoughts on the oil bubble/no bubble argument can be found at the Econbrowser blog and RGE Monitor, if you're interested.

Some thoughts now that I'm back online

Good morning -- I'm back online after a couple days of vacation. What, you didn't notice I was gone? Now my feelings are really hurt. Anyway, here are just a few of the things I'm watching and mulling over today, in no particular order ...

* Mortgage activity slumped in the most recent week, according to the Mortgage Bankers Association. Purchase applications were down 6.9%, while refis were down 8.7%. At 352.5, the purchase index is just off its 2008 low (240.1 in the week of 4/25).

* Troubled lender Impac Mortgage Holdings lost a few bucks in 2007 -- specifically, $2.05 billion. The firm's provision for loan losses rose more than 40-fold to $1.39 billion from $34.6 million in 2006. That's going to leave a mark.

* The debate over an FHA-backed housing rescue plan continues. We'll have to see how the full Senate tackles the issue, and how the Senate bill is reconciled with the plan the House has already signed off on.

* The Vice Chairman of the Fed, Donald Kohn, strongly hinted in a speech yesterday that the Fed is not going to be cutting rates at its two-day meeting that concludes June 25. Kohn's key comment was:

"With the information now in hand, it is my judgment that monetary policy appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term. But a large measure of uncertainty surrounds that judgment and as the economy evolves, so will the appropriate stance of policy."

There's a lot of other stuff in the speech about commodity prices, the Fed's role in helping drive them higher and so on. You know I've been harping on that issue for a while now.

Washigton Post: Prices rising so quickly that gas pumps can't keep up

The Bureau of Labor Statistics told us the other day that gas prices are down. The Fed has been blathering on for months about how inflation is "contained." Unfortunately, here in RealityLand, that doesn't fly. In fact, there's a great story in the Washington Post today about how gas prices are rising so quickly that some older gas stations with analog pricing mechanisms can't keep up anymore. The little pricing wheels stop at "$3.99." Here's an excerpt ...

"Like a lot of small-scale entrepreneurs, Cathy Osborne worries that she'll go out of business if fuel prices rise above $4 a gallon. Not because she won't be able to buy gas at that price, but because she won't be able to sell it.

"The old mechanical gas pumps with scrolling dials at her country store in Fauquier County lack the gears to go beyond $3.99 a gallon. State inspectors shut down her diesel pump several months ago when the fuel topped the $4 mark, so now all that's left are two pumps dispensing 87-octane gasoline, set at $3.75 -- and climbing.

"I don't know what I'm going to do. I don't have $30,000 to invest in new pumps, and I'm barely skipping by," said Osborne, who owns the Orlean Market and Restaurant, a store dating from 1892 with horse-country views of the Blue Ridge Mountains and miles of rolling Virginia Piedmont.

"Osborne said she doesn't make money on fuel sales, but the pumps are a big draw for the hay farmers and cattlemen who gas up their tractors and take their morning coffee in her store. The next-closest service station is a 40-minute round-trip drive to Warrenton, and in Orlean, Osborne's barbecue sandwiches and Amish-baked cherry pie face no competition."

Meanwhile, regarding my last post about inflation expectations, the Fed has said repeatedly that it closely monitors them. Official after official has come out and said that rising inflation expectations would be a real problem. One example: Chicago Fed President Charles Evans said earlier this week that "any increase in inflation expectations would pose an important risk to the achievement of price stability."

Well, 1-year forward inflation expectations are now at the highest level since February 1982. Five-year forward expectations are the worst since August 1996. The federal funds rate was 15% and 5.25%, respectively, at those times. So I'm sure any minute now, we'll hear an announcement about an emergency Fed conference call and subsequent rate hike. Yeah, right. More than likely, the Fed will continue to maintain its "all hat, no cattle" approach to fighting inflation.

University of Michigan survey: Confidence down, inflation expectations off the charts

Yesterday I posted about the Fed's current dilemma: The growth numbers don't look good, but the inflation numbers are off the charts. That trend continued into May, according to the latest figures from the University of Michigan. The group's confidence index dropped to 59.5 from 62.6 in April. That's the lowest reading since June 1980. Indices that track both current conditions and the outlook for the future slumped.

Here's the kicker: An index that measures inflation expectations for the next year jumped. Consumers now expect inflation to run at a 5.2% page over the coming 12 months. That's up from 4.8% in April and the highest reading going all the way back to February 1982 (a tie). Five-year forward inflation expectations climbed to 3.3% from 3.2%. That's the highest reading since August 1996 (a tie).

Housing starts, permits pop in April; Multifamily leads the way

April residential construction data was just released, and the numbers showed a pretty sharp snapback from March's depressed levels ...

* Overall housing starts came in at a seasonally adjusted annual rate of 1.032 million last month, up 8.2% from an upwardly revised 954,000 in March (previously reported as 947,000). Starts were down 30.5% from 1.485 million in April 2007, but well above forecasts for a reading of 939,000.

* Building permit issuance also popped -- 4.9% to 978,000 units from an upwardly revised 932,000 in March (previously reported as 927,000). That's still down 32.9% from the year-earlier reading of 1.457 million, but above the average forecast of 978,000.

* Breaking it down by property type, single-family starts were down 1.7% to 692,000 from 704,000. But multifamily starts rose 36% to 340,000 from 250,000. Single-family permitting activity increased 4% to 646,000 from 621,000, while multifamily permitting climbed 6.8% to 332,000 from 311,000.

* Regionally, starts fell 12.8% in the Northeast. But they rose 24.4% in the Midwest, increased 3.6% in the South and rose 18.5% in the West. Permits dipped 1.8% in both the Northeast and the South. But they climbed 11.9% in the West and 27% in the Midwest.

My favorite weatherman forecast is "a mixed bag of clouds and sun." Not sure why, I just find it catchy. And frankly, that's how I'd describe the latest housing numbers. On the one hand, housing construction rebounded from extremely depressed levels in March. On the other hand, the activity was driven by the volatile multifamily category. To give you an idea of how much multifamily starts jump around, consider the month-over-month changes reported during the last several months ...

April: +36%
March: -35.1%
February: +22.6%
January: +42.1%
December: -39.1%
November: -7.2%
October: +57%
September: -32.5%

Get the picture?

Meanwhile, single family starts are much less volatile and in that part of the market, the discouraging trend remains. One-family starts have now declined for 12 straight months in a row, leaving them at their lowest level since January 1991. The permitting data was a bit more encouraging, with both single-family and multi-family permit issuance rising last month. The key question is whether the pop in activity is sustainable.

We also can't lose sight of the demand side of the "supply and demand" equation. The news isn't all that encouraging there. While deeply discounted homes and REO super-bargains are moving, existing home sellers and home builders are still having a tough time clearing out inventory. That's the story told by the NAHB figures yesterday, which showed current sales activity slumping to a fresh low and buyer traffic waning.

NAHB index dips in May

We just got a look at the latest National Association of Home Builders survey. Here's what the May numbers looked like ...

* The overall index slipped to 19 this month from 20 in April. Economists were expecting an unchanged reading. The cycle low (so far) was 18 in December.

* The sub-index measuring current home sales fell 1 point to 17, a fresh cycle low. The sub-index measuring expectations about future sales dropped 3 points to 27. And the sub-index measuring prospective buyer traffic slumped 2 points to 17.

* Regionally, we saw declines in three of four tracked areas. The index fell 4 points to 18 in the Northeast, 3 points to 12 in the Midwest, and 2 points to 22 in the South. The index climbed 3 points to 20 in the West.

If you're looking for positive housing news, you're not going to find it in today's report. NAHB figures show the housing market continues to struggle, with builder confidence broadly slumping and buyer traffic cooling. The causes are well-documented: Tighter lending standards, rising unemployment, and a lack of confidence among potential home buyers.

That said, lower home prices are starting to work their magic in select locales. They are enticing some bargain hunters off the sidelines, and helping us chip away at the mountain of inventory for sale. It will take quite some time for supply and demand to come back in line. But at least it's a start.

The dilemma continues: Growth weak, inflation elevated

The latest economic data and market action continues to underscore the stagflation-lite environment we're in ...

For starters, today's figures were disappointing on the growth front. The May Empire Manufacturing index came in at -3.2. That compares to an April reading of 0.6 and expectations for a reading of 0. Meanwhile, industry production was down 0.7% in April. That compared with a March reading of +0.2% and expectations for a -0.3% figure.

Capacity utilization also dipped to 79.7% from 80.4%. That's the lowest reading since September 2005 and below expectations for a reading of 80.1%. Lastly, initial jobless claims rose to 371,000 in the most recent week from 365,000 in the week before. Continuing claims climbed to 3.06 million, the highest since March 2004.

At the same time, respondents to the Empire State survey said inflationary pressures are rising. Their input costs rose 8.7% in the past year, on average, while their selling prices rose by roughly 3%. In other words, rising costs aren't being completely passed through. But companies are clearly finding ways to charge more, raising inflation risk. And in early trading, crude oil is up by another $1.80 to just over $126 a barrel.

UPDATE: The Philadelphia Fed index came in at -15.6 in May vs. -24.9 in April and expectations for a reading of -19. Combing through the details, the new orders index improved to -3.7 from -18.8 and the employment index climbed to -1 from -11.1. Meanwhile, the prices paid index rose to 53.8 from 51.6 and the prices received index climbed to 31.6 from 30.9. The saga continues: Growth weak, inflation pressures elevated.

Curious CPI: +0.2% overall, +0.1% core

I've seen a lot of weird numbers in my lifetime, but this latest Consumer Price Index takes the cake. The overall CPI reportedly increased 0.2% in April, down from 0.3% in March. Meanwhile, the "core" (ex-food and energy) CPI gained only 0.1%. That brings the year-over-year rate in CPI inflation down to 3.9% from 4%, and leaves the core CPI YOY gain at 2.3%, down from 2.4%.

But here's where things get curioser and curioser. The CPI figures included a 0.7% drop in the cost of transportation, driven by -- you'll love this -- a "2.0 percent decrease in the index for gasoline." Is there anybody in their right mind who believes gasoline prices are going DOWN? And it gets better. Quoting from the release: "The index for public transportation declined 0.4 percent in April, reflecting a 0.5 percent decrease in the index for airline fares." Is it just me, or haven't we been reading about multiple fare hikes in the past few weeks?

I can understand some of the other decreases, such as the drops in recreation prices, and automobile and lodging costs. They are likely coming down due to the weak economy. But this energy and airfare stuff is just plain hokey. Regardless of what I think, the bond market likes the news for now -- 10-year yields were up to 3.97% before the report. They're down to roughly 3.92% as of this writing.

RealtyTrac: No rest for those weary of foreclosures

From the AP this morning:

"More U.S. homeowners fell behind on mortgage payments last month, driving the number of homes facing foreclosure up 65 percent versus the same month last year and contributing to a deepening slide in home values, a research company said Tuesday.

"Nationwide, 243,353 homes received at least one foreclosure-related filing in April, up 65 percent from 147,708 in the same month last year and up 4 percent since March, RealtyTrac Inc. said.

"Nevada, Arizona, California and Florida were among the hardest hit states, with metropolitan areas in California and Florida accounting for nine of the top 10 areas with the highest rate of foreclosure, the company said.

Incidentally, this is a new high for total filings, as you can see in the chart above. The previous monthly record was 239,851 in August 2007.

Why seconds are performing so poorly: One FL example

Bank of America made some headlines today when it announced that losses on its book of home equity loans, or second mortgages, would be worse than expected. Specifically, according to Bloomberg:

"Bank of America Corp., the nation's biggest consumer bank, said losses on home-equity loans will be even worse than predicted three weeks earlier, adding to evidence that more consumers are falling behind on debts.

"More customers are under financial stress and using credit cards to pay for necessities, said Liam McGee, president of the consumer and small business division, at an investor conference today in New York. Losses on the bank's $118 billion in loans linked to home values may top 2.5 percent, higher than the 2 percent to 2.5 percent projected last month.

"Credit-card customers are cutting back on retail, travel and entertainment purchases, said McGee, whose company is the nation's largest credit-card issuer and ranks No. 1 by deposits. That backs up economists and bankers who say the U.S. may be teetering near a recession as consumers struggle with job losses and gasoline prices of more than $4 a gallon.

"McGee said Bank of America expects the economy, measured by real gross domestic product, will shrink in the second quarter. The bank had $184 billion of credit card debt outstanding at the end of the first quarter and about a 20 percent market share.

"Credit and debit-card purchases for "necessary'' items, including fuel, food and utilities, grew by 13 percent in the first quarter, while spending for retail, travel and entertainment increased 0.5 percent, the bank said today."

Meanwhile, Moody's Investors Service is out on the tape talking about how the bond insurers MBIA and Ambac Financial face "meaningfully" higher losses on HE loans and CDOs. Specifically, Moody's says seconds are performing much worse than expectations. Here's an excerpt from the firm's "U.S. Subprime Second Lien RMBS Rating Actions Update," which provides some more details on what the firm is seeing:

"Losses to date on loans backing 2005-2007 vintage subprime second lien-backed RMBS have greatly exceeded Moody's original expectations. Beginning early in their lives, second lien pools included in 2006 and 2007 transactions saw substantially higher delinquency and loss levels in comparison to earlier vintages at the same level of seasoning. Three months after issuance, serious delinquencies (those more than 60 days) on 2006 vintage loans were 2.7% of original issuance compared with 1.7% for 2005 vintage pools. 2007 vintage loans deteriorated even more rapidly; by month three, 5.3% of loans were seriously delinquent, nearly double the level for 2006. The extreme level of early payment default seems to be attributable to aggressive loan underwriting as well as to payment behavior by certain homeowners who may never have intended to make a payment on their loans.

"Pool losses came quickly with the rapidly rising delinquencies. Unlike first lien loans that go through a lengthy process of foreclosure, second lien loans are written off by servicers when they expect that no recovery is foreseeable. In light of the pressure on home prices and limited or negative borrower equity in their homes, many second lien loans were simply written off after being delinquent for six months. Because the limited borrower equity left little room for recovery, many of the loans have defaulted with severities around 100%."

"With only 15 months of seasoning, 2006 vintage loans have lost nearly 10% of their original balance, and 2007 vintage pools have lost just over 8% by month 9. Even with these early losses, the pace of delinquency has not yet significantly slowed with seasoning. Troubled borrowers concerned about losing their houses tend to default on their second lien loans before their first lien loans because, with no equity in the home, the second lien lender has little incentive to pursue foreclosure."

That's a lot of jargon and industry-speak to digest -- and it might leave you wondering what things look like on the ground. What's happening with second lien loans in the "real world" and why are they performing so poorly?

Well, I just stumbled across a nearby town house listing. It's advertised as a short sale at $108,000 (subject to bank approval, of course). So I did a bit more digging into the property's history. Turns out it sold for just under $80,000 in August of 1990, then next changed hands for a little less than $90,000 in May 2001. Total gain in almost 11 years: about 13%.

It next sold for $94,000 in November of 2002. But shortly thereafter, our bubble here in South Florida started inflating. Before long, people were outbidding each other left and right for both new and existing homes and lending restrictions were being slashed to the bone. The same property then changed hands for $170,500 in October 2004 -- up more than 81% in just under two years.

Here's the kicker -- it looks like the property was financed with a $153,450 first mortgage and a home equity line of credit for $17,050. Yes, that means the buyers put nothing down on a home that had almost doubled in value in just a couple of years. And yes, this same town house -- with $170,500 in loans (minus whatever principal has been paid down in the meantime) -- is now being marketed as a short sale for almost $63,000 less. I'm betting the second lien lender isn't feeling too warm and fuzzy about his loan.

Hopefully this example gives you an idea why second lien lenders are in a world of hurt, especially if they're loaded up with loans against properties in markets where values are deflating fast.

WSJ: Community associations hit by delinquent borrowers

There's a good story in the Wall Street Journal today about how borrower delinquencies and foreclosures are hitting neighborhood association budgets hard. An excerpt:

"Here's another consequence of the troubled housing market: Some homeowners associations are running low on cash.

"The association at Monaco Place, a community of single-family homes and condominiums in Denver, is short $250,000 of its $9.3 million annual operating budget. It can't pay for needed roof and siding repairs to homes. Potholes in the streets haven't been filled in order to save money to keep electricity running in common areas, says Dee Tyler, CEO of Colorado Association Services, which manages the association. Monaco Place was already suffering from a high rate of foreclosures before the credit crunch hit. In the past three years, about a third of its 193 units have been foreclosed on.

"Like Monaco Place, a growing number of homeowner and condominium associations across the country are raising their fees or putting the brakes on clubhouse improvements, new landscaping and other shared neighborhood amenities. The kitty is so low for some that essential services, such as building maintenance, electricity, trash removal and repairs have been cut.

"As community residents lose their homes to foreclosure and new home building has slowed considerably, many of the roughly 300,000 neighborhood associations in the U.S. are grappling with shrunken budgets. One estimate puts the delinquency rate on dues at less than 5% in many markets -- higher than normal, though still not enough to threaten basic services, says John Carona, president of Associa, a Dallas-based company that represents 7,000 community associations in 26 states. Normally, the delinquency rate is about 2%, he says.

"Elsewhere, the rate is much higher. At Spanos Park East in Stockton, Calif., owners of about 25% of the development's 1,500 single-family homes have been delinquent in paying their quarterly dues, according to Adrianne Bretao, a manager at M&C Associations Management Services, which helps to manage the community association. As a result, the association has put off expanding a patio area in the clubhouse and swimming pool this year, says Denise Laven, the association's president."

Personally, my family lives in a South Florida community with a neighborhood association. We haven't been hit with a sharp rise in dues. But plenty of homes are owned by recent purchasers and out-of-area speculators, and foreclosures are starting to crop up (the house across the street is in pre-foreclosure, with a nice browning lawn to boot!). So it could happen down the road.

NAR: Home prices down 7.7% in Q1 2008; Record number of metros showing YOY drops

The National Association of Realtors just released their data on Q1 2008 home prices. Median home prices fell 7.7% from a year earlier for the United States as a whole. That was worse than the 2.7% decline in Q4 2007. Some more details:

* The West led the declines with a -12.3% change, followed by the Midwest at -7.9% and the South at -7.5%. Only the Northeast notched a gain of +3.2%.

* The biggest year-over-year price gains, by metropolitan area: Binghamton, NY at +11.8%, Peoria, IL at +10.4%, and Spartanburg, SC at +10.1%. Other scattered gainers were located in New York, Texas, and Illinois.

* The worst performers were cities like Sacramento-Roseville, CA (-29.2%), Riverside-San Bernardino, CA (-27.7%) and Lansing-E.Lansing, MI (-26.9%). Other "biggest loser" markets were concentrated in California, Florida, Ohio, and parts of the Southwest.

* All told, prices fell from year-ago levels in 100 of the 149 (67.1%) metropolitan areas surveyed. That compares to 77 of 150 (51.3%) metro areas in Q4 2007. Prices are now falling in more metro areas than at any other time since the NAR began collecting this information in 1979.

As the housing slump enters its third year, home price declines are both deepening and broadening. Price declines have accelerated in markets that were overrun by speculators during the boom, including many parts of California and Florida. Meanwhile, the "losers list" of declining markets has expanded -- so much so that a record number of metropolitan areas are showing year-over-year price drops.

I believe the economic slowdown, which is causing unemployment to rise in a broader array of communities, is to blame. Another contributing factor is the credit crunch, which is curtailing financing options for borrowers all around the country. The silver lining to this dark cloud? The faster and farther prices fall, the sooner bargain hunters will be lured off the sidelines -- and the less time it will take to get housing supply back in line with demand.

Import inflation surges by 15.4%

This week is a biggie on the inflation front, with import price data out this morning and the Consumer Price Index coming tomorrow. So what did the April numbers show? That import inflation is simply out of control. Consider:

* Import prices jumped 1.8% on the month, bigger than the 1.6% increase that economists were expecting. More importantly, the year-over-year rate of import inflation is up to a whopping 15.4% (vs. 14.9% in March). As you can see in the chart above, this is the fastest rate of import inflation in the history of the data series, which goes back to 1982.

* What about the details? Ex-petroleum import prices were up 1.1% on the month, and up 6.2% YOY. That's the fastest rise since 1988. Even if you strip out all fuels, you get a 1% monthly rise and a 5.8% YOY increase.

* Food and beverage prices were up 0.4% on the month (12.6% YOY), industrial supply prices rose 3.9% (37.3% YOY!), capital goods prices were up 0.8% (2.1% YOY), and consumer goods prices gained 0.2% (2.8% YOY). As you know, I have also been watching the price of imports from China. They increased once again -- though the monthly gain moderated to 0.2% from 0.6% in March. Chinese imports are up 4.1% in price from a year ago.

Another key piece of data: The retail sales report from April was in line with expectations -- down 0.2%. But if you strip out autos, you get a 0.5% rise, better than the 0.2% increase economists were expecting.

Look, I'm sorry if this sounds hyperbolic, but these inflation rates are out of control. Out of control. We are talking about a year-over-year import inflation rate of more than 15% -- the most ever (figures go back to 1982). In his satellite-delivered remarks to the Federal Reserve Bank of Atlanta Financial Markets Conference in Sea Island, Georgia today, Fed Chairman Ben Bernanke focused exclusively on conditions in financial markets, and the Fed's efforts to boost liquidity. But somebody at the Fed better step up and start sounding the inflation alarm.

Bond traders aren't waiting around, by the way. They're selling -- long bond futures were recently down 19/32 in price. The yield on the 2-year Treasury Note has surged 12 basis points to 2.42%.