I was on The Kudlow Report last night. Here are the notes I sent to the CNBC producers for the show:

On Corporate Bond Spreads:

February foreclosure data from RealtyTrac showed the third monthly decrease in overall foreclosure activity in a row. But, in the end, this data cannot be taken with much optimism as filings remained at 308,524. This represents the 12th month in a row that foreclosures have been above the 300,000 mark, and continues to be reflective of the fact that the number of struggling homeowners is hardly improving.

Total default notices were up 3% from January, indicating a slight increase of newly troubled borrowers. Meanwhile, foreclosure auction activity decreased by 1% and bank repossessions decreased by 10%. Areas like California, Florida, and Michigan remain a high proportion of the foreclosure filings, while Nevada is still squarely the worst state for foreclosures per capita.

Foreclosure stats for February indicate that 308,000 U.S. households received some type of foreclosure related notice during the month. Of all U.S. residential mortgage holders, 15% have either missed some payments or are in foreclosure. Mainstream news outlets reported these depression level numbers as "good news" because the rate of foreclosure activity was only 6% higher in February than the huge level that had been reached a year earlier.

Housing is at the epicenter of the economy's problems and the situation has consistently gotten worse since the market's peak in September 2005. The decline has continued even though there are numerous federal and state programs aimed at shoring up the housing market. Government policy seems to have been highly effective at creating the housing bubble, but impotent in cleaning up the mess. President Obama stated in a speech in Mesa, Arizona in February 2009 that his administration's housing programs would help three to four million homeowners avoid foreclosure through loan modification programs. More than a year after that speech, the latest figures indicate that 116,300 home mortgages have been modified through federal programs. At that rate, it will take as long as 34.4 years to fulfill Obama's promise.

The home is the center of the economy. When the number of new homes on which construction is started (housing starts) begins to plunge, a corresponding spike in national unemployment is upon us. An inverse correlation of housing starts and unemployment is easily seen in the chart above. And the housing starts plunge precedes the stock market plunge.

The elasticity of housing supply is the effect on the flow of home building (measured as a log change -- think of it as a percentage change) of the inflation-adjusted purchase price of housing (also measured as a log change).

The elasticity has long been studied in economics; one of the seminal studies was published by Professors Topel and Rosen in 1988.

Last week I posted a Bloomberg news article supporting my suspicions that investors are putting bad loans back to the banks at an increasing rate. I used JP Morgan (JPM) as a specific example - Banks Swallow Another $30 billion or So in More Losses as Their Share Prices Surge (Again).

A few commenters on syndicated sites appeared to have really underestimated the significance of this development. In the article, it is alleged that Freddie (FRE) and Fannie (FNM) are forcing banks to eat up to $30 billion in soured mortgages under the warranties and representations clauses of the sales contract. To highlight the significance of this development, let me remind all that Fannie and Freddie are benchmarks for mortgage lending in the US.

E-House Holdings (EJ), despite stellar earnings, seemed to go into a tailspin a few months ago due to fears of a percolating real estate bubble in parts of China. While the pace of news stories on that front has only increased of late (NYT - Skyrocketing Prices May Point to Real Estate Bubble in China) the stock has rebounded with the return of speculators into the US-listed Chinese small and mid cap stocks the past few weeks. It certainly seems that, based on these corporate results, the stock was unfairly hit the past few months, once more showing the market is less about reality and more about perception of reality. Companies in far worse fundamental shape have been skyrocketing for months without a care in the world. (Click to enlarge)

Earnings reports for both E-House, and its subsidiary China Real Estate Information (CRIC) were released yesterday and were quite good. The full report for E-House is available here.

The Mortgage Bankers Association (MBA) publishes the results of a weekly applications survey that covers roughly 50 percent of all residential mortgage originations and tracks the average interest rate for 30 year and 15 year fixed rate mortgages, 1 year ARMs as well as application volume for both purchase and refinance applications.

The purchase application index has been highlighted as a particularly important data series as it very broadly captures the demand side of residential real estate for both new and existing home purchases.

Houses are valuable because people like to live in them, or at least (as with many second homes) know that space is available for them to live in. The fundamental value-added of a house over, say a year's time frame, therefore depends on how effectively a particular structure satisfies that demand, as compared to alternative structures that existed that year.There are two fundamental, yet universally ignored, reasons why the purchase price of a house might vary more than the flow of value-added.

Monday, Barney Frank came out with a letter addressed to some of the big banks putting some muscle on them. He wants them to write off their second lien mortgages. He thinks the seconds are junk. His words:

Large numbers of these second liens have no real economic value.

I am loath to rent. I just can’t stomach the idea of paying for someone else’s mortgage. When I first arrived in China back in 2006, I fully intended to buy property once I got the lay of the land. But when I started looking, I quickly realized that residential real estate was pricey, even by Boston standards.

And since then, it has only gone up. Conversely, rents are very reasonable and have increased only modestly. Renting here always seems to make more sense than buying. Anyway, after nearly four years in China, I spent the last two weeks looking for a new apartment to rent in a better part of town, which has opened my eyes to what appears to be a frighteningly large bubble. While I haven’t done any formal research, there is a tower of anecdotal evidence that suggests that the current market prices of residential real estate are unsustainably high, at least in Shanghai and other first-tier cities.

R.A. (Ryan Avent!) writes in response to my previous entry:

[Mike's thesis] places the government in a bind. If it forces banks to write down worthless second mortgages to clear the way for new modifications, then the banks suddenly look shaky again. If it doesn’t, then lots of homeowners are stuck in loans they can’t modify and may not be able to afford.

OK, here I go with another educational concept that has no immediate and actionable investment advice. I heard a couple of uninformed comments about housing. One was that the market needed to push prices down so that it would clear. This reflects ignorance. Markets clear at the current price.

The other was about shadow supply. Let's take a closer look.

Ann Lee and Dan Alpert joined Bloomberg’s Pimm Fox Tuesday to talk about the housing market recovery. Lee, a professor of finance at New York University, was sceptical that population growth predicts any substantial increase in housing transactions and prices simply due to the continued pressure on wages and disposable income. and Dan Alpert, managing director at Westwood Capital LLC, said we are not looking at market-clearing prices in the near-term because home ownership percentages need to drop. This process will take two to two and a half years in his view.

Short clip below.