The housing market can use all the good news it can get, and the latest news out of Southern California is definitely good, as home sales in the month of April reportedly jumped 22% in that part of the state.

California has been hit pretty hard in the recent housing crunch. Of course, the reason why California has been so hard hit is because it was also one of the states that had the best growth during the housing boom.

The flip side of the story is that the rise in home sales was mostly led by bargain hunters who swooped into the market and picked up foreclosed properties. According to the report, 38% of the homes purchased last month had been involved in foreclosure procedures at some point over the past year.

Despite the weak housing market, not everyone is feeling the pain, including Donald Trump who recently made a killing selling a home in Palm Beach for a reported $100 million.

While Trump concedes that the housing market is still weak, he states that he thinks things are about to turn a corner. Trump said that what is most troublesome to him right now is that people are still pretty shy about investing in America, and is what he calls the "saddest part" of all concerning the current economic situation in the country.

Since the American economy is driven so much on oil, Trump admits that there are better investments that you can make by looking abroad.

If you are like me, you are probably getting pretty tired of reading bad housing news day after day, so today it is nice to bring you some good news on the housing market, as mortgage applications rose last week for the first time in three weeks.

According to the Mortgage Bankers Association, the week ended May 2 saw a 15.6% jump in the association's index of mortgage applications. The index takes into account both new purchase as well as refinance loans.

It is a good sign for the housing market, which is entering into its peak buying season. Perhaps this is the moment we have been waiting for, when buyers are finally ready to come back into the market and sweep up some heavily discounted houses. Home prices have been steadily falling for the past year, but signs are starting to point to a possible stabilizing early in 2009.

AP reports that home sales dropped to levels not seen since the George H. W. Bush housing recession in 1991. And home prices are plummeting faster than they have since 1970.

Here are the details: new homes dropped by 8.5% in March to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991. And the median price of a home sold in March dropped by 13.3% compared to March 2007, the biggest annual price decline since a 14.6% plunge in July 1970.

What the current Bush housing collapse and the earlier one share is the after math of too much capital flowing in to the housing market. Under Bush the elder, the capital flowed in due to the deregulation of the Savings & Loan industry -- resulting in a $250 billion bailout. Under Bush II, the problem was the $1.3 trillion subprime mortgage market which made capital available to people who couldn't afford to pay the mortgage -- after all, 47% of those loans required no documentation of borrower's income.

The Boston Globe interviews Warren Group CEO Timothy Warren whose firm tracks housing in Massachusetts. He suggests that it could take about 10 years before housing prices return to where they were at the peak in 2005.

Warren is a breath of fresh air when it comes to analyzing the housing market. Unlike industry-sponsored studies -- such as this bubbly comment from the National Association of Realtors -- Warren carefully tracks and analyzes data and his observations are not filtered by the need to use public pronouncements to spur real estate transactions.

But Warren's loyalty appears to lie with objective data gathering and analysis, rather than having an ulterior motive. He thinks that the declining number of home sales is worse than the previous housing slump of the early 1990s. He notes that "In the 1990s, we had just two years when the number of sales declined. We are in the fourth year of declining sales in the current slump."

Yesterday I received a great comment from long-time reader Dr. Michael Schneider of barrelomoney.com. He wrote:

Every market has buyers and sellers-- so far it seems the remedies for the housing mess have been directed at helping the banks and homeowners (sellers) and, rightly or wrongly, propping up housing prices. This has the effect of helping those who created the mess or who profited from it while possibly hurting potential buyers-- including 1st time home-buyers who may have to pay higher prices for homes that may still be overpriced.

This may seem like fairly obvious point but it has profound ramifications: it's been completely missed by the people who are supposedly working to solve these problems. Propping up home prices delays the inevitable reversion to something resembling intrinsic value, and prices first time home buyers out of the market.

This was one of the effects of the subprime bubble as well: lax lending prices that made homes available to people with brand new SUVs and double-digit FICO scores made it difficult for people who wanted to do it the right way: work hard, save money, and make a 20% down payment on an affordable home with a 30-year fixed mortgage.

When you think about it like that, you have to wonder why there is so much resistance by supposedly reasonable politicians to just letting the darn prices come back down to earth: it's a zero-sum game, and lower home prices will help just as many people as they hurt.

The New York Times reports that Berkshire Hathaway Inc. (NYSE: BRK.A) Warren Buffett's annual letter includes some important observations about the state of the securities markets. The one I found most eye opening was that companies are using unrealistically high assumptions about pension fund returns to boost their reported earnings.

Here are three themes I found most interesting:

• 8% pension fund return assumptions. Buffett said that many companies assume their pension funds will earn 8% a year from investments, a return he deems unlikely given the low level of interest rates, but one that lets them report higher profits now. Buffett notes that by the time those managers need to lower those assumptions to be more realistic, they'll be long gone from their jobs -- along with their bonuses.
• Ending of Home Price Appreciation (HPA) exposes financial folly. Buffett coined a new acronym, HPA, to highlight a familiar point. People were willing to take on risky mortgages because they assumed that their houses would rise in value. He noted that "As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out - and what we are witnessing at some of our largest financial institutions is an ugly sight."

In a widely expected move, the Bank of England lowered a key short-term interest rate by one-quarter point to 5.25%, the bank announced, in a statement.

"The prospects for output growth abroad have deteriorated and the disruption to global financial markets has continued," the BOE said.

The BOE added that credit conditions for households and businesses were tightening and that growth in consumer spending had eased. In addition, the bank said various business surveys indicated that further economic slowing is likely.

The pound fell substantially versus the dollar on the news. The pound fell about 1.6 cents to $1.9455 in heavy trading Thursday at mid-day.

As traders and investors digested the impact of the market's latest sell-off on both assets and investor psychology, Tuesday's jolt is likely to speed the passage of a U.S. fiscal stimulus package to boost the ailing U.S. economy, economists and analysts said Tuesday.

President Bush and U.S. Congressional leaders from both parties are expected to discuss this afternoon that fiscal plan, which should aide place $140-160 billion into the econmy, Bloomberg News reported Tuesday.

Fiscal stimulus: sooner the better

Independent currency trader Andrew Resnick, said if Tuesday's market jolt prompts President Bush and lawmakers to agree on a package of tax cuts/rebates and spending increases, then the market's latest gyrations "will turn out to be a blessing in disguise."

Consumer prices rose 0.3% in December, above the 0.2% consensus estimate, but the core rate rose just 0.2%, in-line with the 0.2% consensus estimate, the U.S. Labor Department announced Wednesday.

Prices at the retail level increased at an above-average rate during 2007. For 2007, consumer prices increased 4.1% - - the biggest increase since 1990. Energy prices rose 17.4% in 2007 while food advanced 4.9%.

Meanwhile the core CPI rate increased 2.4% last year - - above the Federal Reserve's 'comfort zone' for inflation. The Fed uses the core CPI rate as the primary gauge of consumer-based inflation.

In December, energy prices rose 0.9%, gasoline increased 1.1%, natural gas climbed 2.3%, medical expenses increases 0.3%, and housing prices rose 0.3%.

Economic Analysis: A lukewarm CPI statistic. December's 0.3% CPI increase was above the consensus estimate, but the core CPI rate rose just 0.2%. The December core statistic should help convince the Fed that inflation - - while still at intolerable levels as measured by the producer price index (PPI) - - has not shown up fully yet at the retail level. That should enable the Fed to cut interest rates by 50 basis points at its next meeting, and later this winter to help stimulate the slowing U.S. economy.

Home prices fell 6.1% in the past 12 months -- the largest 12-month decline in at least six years, and a sign that the housing market remains in a pronounced slump, research from the S&P/Case-Shiller home price index indicated Wednesday. In the survey, all 20 metropolitan markets surveyed showed year-over-year price declines.

Analyst C. Leonard Bauer, formerly of Prudential, told BloggingStocks on Wednesday that the October 2007 Case-Shiller data confirms some of the worst fears analysts have about the U.S. housing market heading into 2008.

"This is a sobering statistic," Bauer said. "It confirms a housing market in a deep slump. This is the worst year-over-year decline in prices that I've seen nationally, and I've been following housing for 20 years. The northeast [U.S.] condo slump in the early 1990s saw bigger percentage drops but that was only one section of the market. This is across the board."

U.S. Treasury Secretary Henry Paulson is on the wires again, this time predicting that the number of potential home-loan defaults "will be significantly bigger" in 2008 than in 2007.

In an interview with The Wall Street Journal (subscription required), Paulson said, "The nature of the problem will be significantly bigger next year because 2006 (mortgages) had lower underwriting standards, no amortization, and no down payments. He added that "We'll watch carefully mortgages that will be reset."

Home prices fall

Paulson's comments came before the National Association of Realtors announced that home prices had fallen in 51 of 150 U.S. metropolitan areas in Q3, with the median sales price falling to $220,800 in Q3 2007, compared to $225,300 in Q3 2006. The NAR also announced that home sales fell to an annualized rate of 5.42 million units, including single-family homes and condominiums, compared to a 6.29-million-unit annualized rate a year ago.

Housing prices in July posted the largest single month decline in 6 years. We have now seen home prices drop during every single month in 2007 and continue to ask ourselves just how long the current situation is going to linger.

The 10-city S&P/Case-Shiller home price index that was released this morning fell by 4.5% in July. The 20-city index showed a pull back of 3.9% from July of last year, with 15 out of 20 cities showing declines.

The five cities were prices rose were Atlanta, Charlotte, N.C., Portland, Seattle. Atlanta and Dallas. Atlanta and Dallas better enjoy the good times while they can though because they are getting very close to moving into negative territory, according to S&P.

Will the current housing slump actually lead the country into a full blown recession? That debate is still out, but Robert Shiller, the Yale University economist whose name is on the index, stated last week that we are facing a "significant risk" of the dreaded "R" word.

[phto D'Arcy Norman]

Michael Fowlkes is an analyst for the online investment advisory service Investor's Observer

Yesterday I was stunned to learn that Fed Chair Ben Bernanke had cut the Fed Funds rate 50 basis points to 4.75%. However, I had predicted that if he did cut the rate that much, the Dow would soar between 200 and 300 points. My high end estimate was 30 points too low.

What worried me the most about the cut was that the stated reason was pretty vague -- something about the risks to growth outweighing those to inflation -- and not supported by any numbers. Then I read this morning's New York Times [registration required] which suggested that at last month's Fed retreat in Jackson Hole, WY, economists presented economic forecasts based on the assumption that housing prices decline between 20% and 40% in the next several years.

I doubt the Fed's rate cut can do much to stop this problem -- although borrowing more money might delay the worst effects until the next president is in office. If this is the reason for the unexpectedly large interest rate cut, Fed officials should say so. While we have no power to decide interest rates, in a democracy I believe we at least have the right to know why those decisions are made.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.

Earlier this month we took a look at how foreclosures were at record levels for the April - June quarter, and according to new data, August was no better for homeowners. According to RealtyTrac Inc., there were a total of 243,947 foreclosure filings in August, representing a 115% rise from the same period last year.

To get a better idea of just how hard Americans are getting hit, just consider this: during August, the national rate for foreclosures was one home out of every 510 households. While this figure is scary enough, it gets even worse for California residents. California had the largest amount of foreclosures of any state in the country with 57,875 foreclosures. That works out to one out of every 224 homes, and a 300% jump from last August.

The current trend is, unfortunately, not showing any signs of reversing itself. A big reason for the recent surge in foreclosures can be attributed to the large amount of adjustable interest rates that were issued during the housing boom in the early 90's. As these loans have gone through rate hikes many families are finding out the hard way that they just can't keep up their payments. It is estimated that there are going to be somewhere in the neighborhood of another 2 million of these loans adjusting higher before the end of this year. It definitely doesn't paint a pretty picture.