For developers, getting saddled with unsold units drags down the bottom line. So selling off a slew of units at once makes sense, even if it cuts profit margins in the short term.

During the recent housing boom, builders' profit margins often ballooned to 30% or higher on new-home sales. (Developer) Sares-Regis sold off all the units at an average selling price of $401,000, a 15% discount from where the company had tried to sell its units before the auction.

For Matt Fleischman, the auction provided a chance to become a first-time homeowner in a community he figured was well out of his reach.

The 24-year-old mental health therapist, who lives with his parents in Westminster, had been diligently looking for a place to buy in Aliso Viejo for several months. But with the median home price in the mid-$500,000s, he was unable to find anything within his price range. So he was determined to bid on every condo put up for auction by Sares-Regis.

Fleischman's persistence paid off. He ended up with a two-bedroom condo for $410,000 — his upper limit.

If you want to read something completely different, why not buy a copy of my novel I-State Lines. It's filled with the same stuff which keeps you coming to my blog (I would like to say humor, important themes of American life and things like that, but actually it's a harmless alkaloid which is released when you start reading anything I've written. How that's done is, understandably, a trade secret).

It was one of the scariest things we've ever experienced! I never ever thought we'd have a quake like that here. If it had gone on much longer, I'm sure our house would have started coming apart, I'm getting goosebumps just writing about it now. Our structure is basically sound, the whole house shifted an inch or two judging from the bent pier straps, but brother, the entire contents of our house, office, studio and shop are totally strewn everywhere, it's a shambles. It really is like a giant picked up our house and shook the crap out it for what seemed to me in hindsight like 30 seconds, my neighbor said it felt like a minute but I don't think so. We just stood in the living room hanging on to each other watching everything crashing down, range moved about 18", woodstove almost off the mantle, chimney and stovepipe crashing down, it was horrific! We've been cleaning all day and the place still looks like a disaster area. Still feeling aftershocks and it's spooky.

Inflated prices potentially cause harm to banks, which could take a hit if the mortgage holder defaults and the home turns out to be worth less. It also could affect buyers of neighboring homes, who may be making decisions based on faulty data.

When sellers use incentives to reduce the actual price without cutting the reported price, "then the reported prices are an overstatement of the true net selling price," said Lawrence White, Deputy Chairman of the economics department at the Stern School of Business at New York University. "So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting."

The realtors association reported that prices of existing homes fell in August for the first time in a decade. That marked the first year-over-year drop in home prices since April 1995.

In calculating the much-watched home price statistics, cash and non-cash perks are left out, implying that true prices are even lower than the statistics indicate.

In the current slowdown, sellers and builders are moving beyond kitchen remodels to offering just plain cash. "An economist would call that a price cut," Duncan said. "That's not captured in the data."

The inventory of unsold homes rose to a record 3.92 million units at the end of August, the National Association of Realtors reported.

Laperriere points out that 79% of FirstFed Financial (nyse: FED) loans in the first half of the year were stated-income loans, according to its latest 10-Q. Almost one-fifth of Washington Mutual's (nyse: WM) loans during the same period were option-ARMs. And at Countrywide Financial (nyse: CFC), 42% of its giant mortgage portfolio consists of option-ARMs.

As an example, 62% of non-agency loans made last year had low or no income verification, up from 24% in 1998. Also,52% of such loans made in 2005 had zero or negative amortization requirements. In 1998 there were no such loans.

He points out that of the record $2.3 trillion borrowed by Americans in 2005, fully $1.2 trillion was an unprecedented level of home mortgage debt. The growth in total borrowings last year was over 9%, way above a longterm trend, and way above GDP growth. The ISI analysts report that American mortgage payments have never been higher when compared with wages and salaries. That excess is not supportable.

29255 Kuhn Lane, Mechanicsville, Md 20659

This newly constructed home by Branchwood Construction started out in the MLS as listing number SM6094479 on 19 June, 2006 with a sales price of $525,000. The trickery with this home began right off the bat, because when the listing was created in the MLS database, a Maryland Tax Identification number for the property was never assigned to the listing. The listing agent simply entered XX-OOO-XXXXXX as the Tax ID. The home was for sale as this MLS number for 47 days.

After not selling by 05 August, 2006, the home was withdrawn from the market and then re-listed as MLS number SM6147351 for $499,000. Being that the house never had a Tax ID entered into the MLS, the DOMM and DOMP are both reset to zero each time a new listing number is created for this house, which can potentially trick a prospective buyer into thinking that the property had just come up for sale. The house had this MLS number assigned to it until 14 October, 2006 when it was again withdrawn from the market. Under this latest MLS number, the home had accumulated another 70 days of DOMM for a total time of 117 days, but the listing only showed the 70 days for the current MLS number. Again, this was because of the missing Tax ID in the database.

By 14 October, 2006, the house had still not sold, and it was again withdrawn from the market. Once again a new MLS number was created. This time the home was resurrected as SM6218316 and even though the home had now been for sale for 117 days, the listing information for SM6218316 reported that it had only been on the market for 1 day. The price had also now been reduced to $475,000.

The reason I am spending so much time on this and making an effort to bring home the point is that if we are not aware of this and prepare for it, the analysts are going to have everyone believing we are on the edge of a catastrophe and the belief that they are right will bring about the catastrophe they predict.

The housing index hit its 50% retracement level. At this level a bounce is expected but does not declare the bottom.

Cramer had Toll Brothers CEO on his show (I was flipping to PBS when I came across him). I won't bore you with an ad hominem rant on this individual but he and his followers may be in for a big surprise.

Toll Brothers stock has retraced 61.8% and should rally but no bottom is in evidence. The fact that there was no meaningful pause at 38.2% and 50% suggests weakness.

In 1930 we found 10 billion new barrels of oil in the world and we used 1.5 billion. We reached a peak in 1964 when we found 48 billion barrels and used approximately 12 billion. In 1988, we found 23 billion barrels and used 23 billion barrels. That was the crossover when we started finding less than we were using. In 2005, we found about 5 billion to 6 billion and we used 30 billion. These numbers are just overwhelming.

The image we have in this country of tumbleweeds running down the streets of abandoned Western mining towns is now beginning to stalk the public consciousness in the Middle East. About three months ago, they realized the second largest oil field in the world, Burgan in Kuwait, had peaked. They didn't expect it and they couldn't believe it. The No. 1 field in the world, the Ghawar, is pretty close to peaking if it hasn't already. These are people who have long believed that Allah was bestowing these oil gifts on them in perpetuity and there would be infinite production. The concept of Hubbert's Peak has only penetrated the Middle East in the last five years in the same way that it has only penetrated Europe in the last five years.

The non-OPEC world, 175 countries, of which only 30 produce meaningful amounts of oil, will peak around 2010. Then we become dependent on OPEC for all future growth in barrel needs and that should put us in a pretty difficult situation and the price of oil will begin to rise a little faster.

Don't think that it is just that rising oil prices equal lower economic growth. It is a question of rising oil prices and less liquidity and higher rates that's a triple threat. The bottom could be in the high 40s, though that wouldn't be sustainable. On a yearly average, we will stay in the 60s, but we'll spend a lot of time in the 50s. Then they'll start up again in 2008-2009 and go up for some time. When we get to $130 or $150 there will be another pullback.

“The bull forces were at work, and the public is never independently responsive to news. You see that all the time. If there is solid bull foundation, for instance, whether or not what the papers call bull manipulation is going on at the same time, certain news items fail to have the effect they would have if the Street was bearish. It is all in the state of sentiment at the time. In this case the Street did not appraise the extent of the catastrophe because it didn’t wish to.” Larry Livingston (pseudonym for Jesse Livermore),
Reminiscences of a Stock Operator


I think people are going to eventually lament that they hadn’t considered the illiquidity of real estate. Generally if your positions are small the investor/trader can move in and out of the market (stock, bonds, commodities) without disturbing it enough to affect his price.

Normally real estate is illiquid. Normally most unsophisticated investors don’t borrow against unrealized gains in their stock portfolios. Even if bond prices go back up to all time highs, can the general public afford home prices today without an unconventional, risk laden mortgage? A return to “normalcy" in housing markets will doom consumer spending. Why would corporations expand when demand for their products is contracting? What’s left to inflate or re-inflate? Those that speculated and those who bought who couldn’t afford to will find themselves caught in the illiquidity trap. Unrealized gains will turn into real losses magnified by leverage.

The dot-com bust wiped out the public. Few got wealthy. The rush to real estate was based on the sure thing concept mixed with desperation. People with no historical context began to repeat mantras (It always goes up) as if hypnotized. Perhaps it is the fear of having to join the 66% of Americans who retired into poverty mixed with the greed to live beyond one’s income that drives people to such irrational behavior.

The implications of what is happening in the housing market should be making people nervous. It is not. Even bears are starting to get edgy about missing something and jumping in (irrational bulls). The early bears positioned short and are getting squeezed and have to buy to cover short positions. And those stops sitting just above the all time highs provide plenty of liquidity for professional traders to liquidate into. The public thinks, “Hooray the stock market will save us from the housing debacle.” The trap is set ready to be sprung.

Greed is not confined to hedge funds, their clients and corporations. It is in everyone who wants something for nothing. Money is made at the U.S. Mint; the individual must earn money. The individual that gets conned does so primarily because he believes there is an easy path to riches. This mentality drives people to live off credit cards and to buy more house than their balance sheet indicates they can afford. This mentality encourages and allows populist politicians to manipulate the markets to strive for economies without recessions. Greed stimulates people to believe they can borrow their way (consumptive debt) to wealth. How else could any rational being believe that the price of anything always goes up? Let the irrational rally continue, we’ve slain secular bear markets!!! I will rush out right now and buy that 600 sq. ft. condo for three quarters of million dollars. Yeah, right.

As always, the public will stay too long and when the inevitable happens they will be worse off than when this all started. The manipulators can play the game as long as they can. The longer they do the more terrible the consequences.

Harun I.

The PointCast Network used push technology, which was a hot concept at the time, and received enormous press coverage. The product did not perform as well as expected, in part because its traffic burdened corporate networks with excessive bandwidth use, and was banned in many places... and people objected to the large number of advertisements that were pushed over the service as well. The client was eventually bundled with Microsoft Windows. At its height in 1997, the directors of PointCast reportedly spurned an offer of $450 million from News Corp for the company. They hoped to go public for a larger amount, but never did.

Instead, they sold out for about $7 million in 1999 to Launchpad Technologies, Inc., and the PointCast network was shut down the next year.

The government’s interest bill is expected to rise to $220 billion this year from $184 billion in 2005. In fiscal 2005, the government spent more on interest than it did on Medicaid ($182 billion). The Congressional Budget Office projects that the interest bill, after climbing nearly 20 percent this year, will rise 13.2 percent in 2007, to $240 billion, and more than 8 percent in 2008, to $270 billion. With each passing year, interest payments are likely to eat up a bigger chunk of total spending and crowd out other priorities.

and a book-- Heart of the Matter

is a book about romantic trust and religious faith.

From The Economist:

"Finance has been convulsed by a computer-enhanced frenzy of creativity. In today's caffeine-fuelled dealing rooms, a barely regulated private equity group could very well borrow money from syndicates of private lenders, including hedge funds, to spend on taking public companies private. At each step, risks can be converted into securities (like mortgage-backed securities), sliced up...re-packaged, sold on and sliced up again. The endless opportunities to write contracts on underlying debt instruments explains why the outstanding value of credit-derivatives contracts has rocketed to $265 trillion – $9 trillion more than six months ago, and seven times as much as in 2003."

Re: The Financial Services Regulatory Relief Act of 2006: Senator Crapo's website description of the bill and marketwatch's story.

Both reforms tweak the capital ratios a little bit and ease some regulatory burdens which is a good thing overall--increased competition, etc. However I think the capital ratios tweaks are not a good thing.

Another interesting reform is in this link: Deposit Insurance Reform Legislation story (FDIC website). This is huge... This is beyond huge. 270 days until implementation and this was signed into law on Feb 15, 2006, so we are almost there.

Bummer I lost my house!
I'm homeless I was a fool
Road is now my home.

Jim T.
(Dedicated to all the ARM victims)


Housing slides downward
Gen-X spirits lift higher
Boomers can't retire

(A little bitter, perhaps; I live in the
long shadow of the baby boom. :-)
Sherry R.


What technology?
Without gasoline this spring,
Ride my bicycle.

Greg R.

OK, on to The Con in Confidence: a look at Herman Melville's classic The Confidence-Man

1. Option backdating. You've heard about backdating options for execs who had the misfortune to pass away before exercising their plump option package... we'll show you how to pull the same trick for your as-yet unborn children. That way, your little tyke can exercise the options well before kindergarten.

2. The "non-recurring expenses" scam. We all know you're under pressure to keep profits rising at 15% year-over-year. Now that you've axed headcount, shipped manufacturing, tech support and the entire back office to India and China, what's left to slash? Nothing? Learn how to use financial legerdemain scams like "non-recurring expenses" to pimp your balance sheets and 10-Qs. It's all legal, of course. Is it ethical? Don't make me laugh with your naive whining, bucko. Get with the program. That candy-ass crap about ethics is for press conferences and annual statement propaganda.

3. What went wrong at H-P. What went wrong at H-P? They got caught! Learn how to spy and bait your employees without the ham-handed mistakes made by the jokers at H-P.

4. Propaganda 101. Some people worship Machiavelli. he's OK but I prefer "1984" as the text to really study. Learn how to flip reality 180% in your marketing campaign. You know--oil companies care about conservation, Wal-Mart gives back to the community--this is the stuff of genius. Learn how to pony up a meager $5 million in self-serving high-profile donations and then make that the centerpiece of a $50 million cross-media "feel good about how much we care about you" campaign. They fall for it every time.

5. Goose your stock price before you exercise your options. We'll show you how the pros do it. Remember how Intel just announced a 10,000-employee lay-off? Ever ask yourself why they just didn't just do it real quiet-like? Or if anyone ever checks to see if they did in fact lower headcount by 10,000? Of course nobody checks, and of course they ballyhooed the "news" in a huge media campaign. How else can you juice your stock price overnight? Claim you're firing an entire army of employees. Wall Street loves to see mass lay-offs. Never mind if you actually follow through--it's all about cashing out your executive package before you exit stage-right.

6. All news is good news. Learn how to turn every development into stock-goosing good news--like the pros on CNBC do all the time. Offshoring? That creates jobs. Sales down? It means our re-structuring is working. Learn the mantra of the stock market cheerleaders: "There is no bad news." Spin is the new black. You can never gone wrong with it.

I feel you are correct when you say that the shareholders are speculators not investors. The ultimate example of which are the day traders - absolute speculation tantamount to gambling. So at what point does speculation become investment? I would say it is highly correlated to the length of time the shares are held.

Realistically the management of companies have little choice. The short term share price is the measurement metric and because options are part of the payment package there is a strong personal motivation to enhance the short term position.

So how to fix it so that companies look to the longer term? Checks and balances, something that naturally opposes the shareholder tendency towards short term profit are required. I would suggest that one way of doing this would be to implement a simple law which requires the minimum period for executive stock options to be 10 years. In other words the managers can collect options every year but cannot cash them for 10 years from the date of issue. That way the executive, who may have long since parachuted to another job, still gets paid by performance but has a real incentive to make sure that everything he does today will ensure the company stock price is higher 10 years from now.

Maybe it can even be an ISO certification. Imagine companies proudly proclaiming that they are ISO 101 Certified for Long Term Growth.

The only reason (new home) sales were higher, as Northern Trust's gimlet-eyed Asha Bangalore points out, is that there were ponderable downward revisions to the previous estimates of new home sales in May, June and July. If the original estimates for July were unrevised, August would have shown a decline of 2.1%, instead of a rise of 4.1%.

Asha goes on to remind that new home sales are known for large revisions. And so, she suggests, a much more reliable alternative is the three-month moving average, which, as it happens, came to 1.05 million new homes sold, the lowest since May of ' 03. Using that three-month average, sales of new homes are down a whopping 19.4% from a year ago.

Meanwhile, inventories continue to swell; at last count, there was a 6.6-month supply of unsold new houses, up from 4.7 months at the end of August '05. Prices, for their part, continue to do what the smart money said they never could -- go down.

Simply put, cancellations are rising, and they aren't being captured in the aggregate statistics because of the way the survey is designed. Hence, sales are being overstated and inventories understated.

Here is the Dow Industrials with all three groups of traders as classified by the CFTC. What is important to note here is the level of net percent holdings by group. Commercials: 38.2% net short, Non-Commercial (Large Traders): 8% net long, Non-reportable (Small Traders) 30.2 % net long.

What does this mean? It means the least knowledgeable, least capitalized group of traders is holding the greatest OI (open interest, in this case long positions) against (betting against that is) the most knowledgeable, most heavily capitalized traders. Normally Large traders (hedge funds and the like) offset Commercials but their net long position is anemic. It might be time to pop the popcorn, pull up a chair and watch how this turns out or position oneself to take advantage of the rout should it occur.