Weekend Open Thread (2009-03-13)

Here is your open thread for the weekend beginning Friday March 13th, 2009. You may post random links and off-topic discussions here. Also, if you have an idea or a topic you’d like to see covered in an article, please make it known.

Be sure to also check out the forums, and get your word in the user-driven discussions there!

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

55 comments:

  1. 1
    EconE says:

    This ones for Eleua…

    Just as he predicted…

    From Bloomberg…

    China’s Wen ‘Worried’ on Safety of Treasuries, Seeks Assurances

  2. 2
    David Losh says:

    Business is War and China should be worried.

  3. 3
    Kary L. Krismer says:

    RE: EconE @ 1 – I’ve been giving Eleua credit for his earlier prediction, but if what was in that article was all he predicted (which I doubt), that would be almost like predicting the sun will rise in the east. Of course they’re concerned with the value of the dollar! They probably don’t have MBAs from American universities.

  4. 4

    It seems like it’s something of a two edged sword:
    China is dependent on the US consumers buying goods manufactured in China, and the US is dependent on China buying our treasuries. As America suffers from recession, we’re buying less stuff from China, and as China sees both the increased risk and low returns from US treasuries, it can’t be easy for them to keep propping up our economy.

  5. 5
    Kary L. Krismer says:

    RE: Ira sacharoff @ 4 – Rather than two edged sword, I’d describe the relationship as co-dependent. Our economy is probably more of a nuclear deterrent for China than all our missiles.

  6. 6
    Robert says:

    So if somebody can comment on what the US can do if China pulls the plug and stops buying the treasuries.

    As sb stated earlier – The US govt cannot print money because of constitution. That’s cool and definitely stabilizes the situation.

    But now back to the Fed. The Fed also cannot print money but US Treasury can. So what would stop US Treasury to print the money to finance deficit? Some people will say the confidence will collapse and there will be a run on the dollar and the dollar will just be worthless paper. But what if they print in controlled manner and they are careful not to start a huge inflation that will wipe out holding of China for example but also savings of many Americans?

    Also did they print any money yet?

    Also – what is exatly the relationship between the Fed and US Treasury?

  7. 7
    Kary L. Krismer says:

    By Robert @ 6:

    As sb stated earlier – The US govt cannot print money because of constitution. That’s cool and definitely stabilizes the situation. ?

    What part of the Constitution is being referenced? I tried to check that out previously and couldn’t find anything suggesting that was true.

    I will note that real bankruptcy lawyers don’ deal much in Constitutional issues, so there could be something to the claim. I just don’t remember it, and have only heard that here.

  8. 8
    Sniglet says:

    China may gripe about their investments in US assets, but at the end of the day they don’t really have much of a choice. What are they going to do, buy Japanese or European government bonds? Those nations are in even worse shape than the US.

    It’s certainly conceivable that interest rates on T-bills could go up as investors become concerned with increased US government spending. However, this would actually be deflationary, pushing the value of the dollar up even more (i.e. people would rather hold cold cash rather than bonds).

    In any event, I still think the odds favour continued appreciation of the dollar against virtually every asset class there is (e.g. commodities, precious metals, real-estate, stocks).

    Here’s the plug for my in-depth explanation of the case for deflation again:

    http://surkanstance.blogspot.com/2009/01/deflation-101-podcast.html

  9. 9
    jon says:

    RE: Sniglet @ 8

    China has done really well by holding US Treasuries, but now they have to be careful about their exit strategy. They need to start selling them in order to stimulate their own economy, but once they stop buying them the US government will be in a world of hurt, and so we will have to start monetizing thus driving down the value of the Treasuries in real terms. So this latest announcement from the Chinese is very conflicted, saying that they will stop buying them if we monetize the debt, while at the same time saying they are going to be selling them anyway.

    And no, none of this is deflationary.

  10. 10
    Robert says:

    So I guess we do not even know for sure if there is even a need of act of congress to print money?

    Plus how hard is it for treasury to print money and give it to Fed and then the Fed starts distributing money to banks? Isn’t that equivalent of printing money?

  11. 11
    Robert says:

    I also think that China should be concerned ONLY if too much money is printed and the resulting unstable inflation. But when the economy is in recession and money velocity is slowing down then even if the govt prints some money it should not cause a decline in purchasing power of the dollar. The issue is whether they trust the US govt to do sthg responsible. The US govt might just flood the market with so much worthless paper that it would devalue debt and would wipe out savings and Chinese savings for that matter.

  12. 12
    Scotsman says:

    China holds about 8% of the federal debt that is in public hands, and about 4% of the total debt outstanding. Up until this point, and especially over the last 5 years they have been major buyers of new debt, making them an important player in the required deficit financing. But going forward, their current holdings are insignificant as the U.S. seeks to expand total debt in public hands by 30 to 50 percent. The Chinese have some money, but not that much, and they certainly don’t have the ability to spend it on us as their own economy and political system will require that they spend much of it at home.

    We are so screwed going forward, people have no idea of the certain trap that awaits just around the corner.

    Also, read today that California is already $8 billion in the hole… again, and the ink on the budget compromise of last month that fixed the last deficit is barely dry. Send them a donation, eh?

  13. 13
    EconE says:

    It does appear that China is in a pickle WRT buying our debt.

    That’s probably why I’ve seen articles like this one…

    http://www.fxstreet.com/news/forex-news/article.aspx?StoryId=82afe43d-8d3c-494d-894d-113c196ed750

    That’s some serious diversification.

    There is a question that I could probably ask till I’m blue in the face and never get an answer to it.

    Why do governments and central banks have such a desire for gold?

    OT…a little FYI…word on the street…as of recent…anonymous cash purchases of bullion are no longer allowed.

  14. 14
    Scotsman says:

    RE: Kary L. Krismer @ 7

    Kary, you’re right, it’s not in the constitution, but in the body of U.S. law that relates to the creation of the Federal Reserve in the early 1900’s. I’m not a lawyer, don’t even play one on TV, so one of you will have to find the exact code, etc. But the bottom line as I understand it is that an act of congress would be required to allow direct printing and distribution of new money by the feds instead of through the existing banking system.

  15. 15
    Angie says:

    Rather offtopically–Scotsman, a few days ago you wrote:

    By your logic drug research isn’t science, because there’s a profit motive

    I knew it would be just a matter of time before this story got wider exposure–about an anesthesiologist on a drug company’s payroll who made up results of dozens of studies out of whole cloth and faked lots of other things, including claiming that some of his critics were co-authors.

    Drug companies know that situations like this are a real danger, but it happened anyway. When the results are good they don’t want to look more closely. The primary motivation for drug companies to make sure that stuff like this doesn’t happen is because the aftermath is always extremly costly, as I’m sure it will be to both Pfizer and Merck. I encourage you to watch how the story unfolds in the business and legal circles, and compare it to what happens to the physician in his professional circles. Pfizer and Merck will carry on, but you better believe that anesthesiologist isn’t going to be permitted to so much as sweep the hospital hallway floor.

    Maybe we can put him and Cramer and Yun and the Dow 36,000 guy off on some desert island and film the outcome as Survivor: Bullshit Artists.

  16. 16
    Scotsman says:

    RE: Robert @ 10

    Robert- when the FED “gives” money to the banks it is actually lending it, not just giving it outright. So the banks have to create an offset, a liability on their books, ultimately backed up by the assets the bank carries. Since the new money comes with a cost- the interest- it can’t be absorbed into the system any faster than it can find/fund productive capacity- something that will pay not only for the original loan, but also for the interest. That is why it is said that all dollars are backed by debt, which is backed by production and the income it represents. I know, it’s weird, and not very intuitive. But the FED can’t push dollars into the system faster than they can find productive uses. After all, they have to be paid for (interest) , and ultimately repaid (principle).

    It’s easier to understand if you think of the total U.S as having a given value, and a given amount of income. That productive capacity and the income it produces stands behind the value of the money. The money is a claim on the future income produced, and the ability to tax it. The system breaks down when the number of dollars grows faster than the income and assets that support it. If we hold assets/income steady, but double the number of dollars, each dollar is immediately worth half of what it was. This is why the government can’t just print up dollars at its pleasure and use them to pay debts. They would be instantly recognized as worth less than the dollars that were originally loaned. And the entire system, not just the transaction in question, would be thrown into a new balance, but at great cost. While the FED is most often credited with controlling the money supply, in reality it is the bond markets that do so. Ultimately, the FED can’t “push on a string” or “get blood out of a stone” if you get my drift. Hope that helps.

  17. 17
    jon says:

    The dollars in circulation are listed as a liability on the balance sheet of the Fed itself. The banks have to maintain a reserve at the Fed, and they can use that reserve to purchase dollars. If a bank found itself needing more dollars for its transactions, and had no surplus reserve, it would have to issue more stock, sell it on the market, and use the proceeds to purchase cash. They wouldn’t do that unless the value of having more cash on hand exceeded their cost of capital.

    What is being proposed to monetize the debt is very different. The Fed may decide to purchase Treasury notes using cash, which the Fed buys at 4 cents on the dollar from the printing office of the Treasury. There is no constraint on how much they do that, other than their own evaluation of the consequences of their actions.

    Article I, section 8 of the Constitution gives the responsibility of the money supply to Congress, but they somehow delegated the actual printing to the Treasury Dept, and the disbursal to the Fed.

  18. 18
    Scotsman says:

    RE: Angie @ 15

    Hi Angie-

    As the parent of a child who has consumed well over a million dollars of modern medical and pharmaceutical care battling cancer, I assure you I’m all too familiar with the distortions and abused logic that come with drug companies and their funding and studies. Cutting edge medicine and research is indeed, in part, about ego, money, and politics. I’m aware that some doctors are brilliant and ethical, and some never should have been allowed in the building. I take pride in putting one such doctor in in an extremely compromising position, in front of her boss, only to never see her again. But… given that my daughter is thriving today, it’s hard for me to throw out the whole system because of the 5% that rots from the head down. Four steps forward, one step back is the rule for most of our society, not just medicine, or drug companies, or Realtors… But I’m a firm believer that in the end everyone gets what they deserve, and if something seems unfair, it’s probably only because there’s more of the story to play out. Merck, for example, was almost taken out by Viox and its failures several years ago. Eventually, if they want to survive, they need to play clean. It’s the difference between process and results, and results dominate in the end.

  19. 19
    Scotsman says:

    RE: jon @ 17

    Jon brings up a great point in monetization. The Fed can indeed flood the market with dollars, but it needs to be pointed out that the Fed and it’s member banks are essentially shooting themselves in the foot by doing so. The Fed is controlled by its member banks, not the U.S. government, and banks hate inflation since it ensures that every dollar they are repaid with is worth less than the dollars they lent out. Plus monetization leads to inflation, which leads to higher interest rates, which means higher borrowing costs for the banks/U.S., which means higher taxes and less room in the economy for private enterprise, which kills the economy, which kills the tax base, which leads to recession. Talk about walking on the razor’s edge. Lots of little moves, no big breaks from convention.

    Got too much debt? You’re screewed, as there is NO easy way out. Welcome the coming depression .

  20. 20
    Robert says:

    RE: Scotsman @ 19

    So Scotsman – the fact that the Fed can flood the market with dollars is kind of like printing money. US Treasury helps? How much money was already printed this way?

    You are saying that this is inflationary activity. But WAIT – we have deflation. So a controlled printing of money is probably ok. How much is ok though? The economy is already in recession and as layoffs go on – people spend less and prices go down as opposed to going up. So the Fed can battle inflation by getting US Treasury to print money effectively so it can by US Treasuries and transfer the USD to people.

    So it would seem there is printing of money going on and it maybe not such a bad thing as long as it is a controlled process?

  21. 21
    deejayoh says:

    The fed can influence money supply (M0) without printing any money, and they have done so – by distributing “reserves” to member banks – to the tune of $800B

    The problem is, almost none of this money has made it’s way into the economy. Which is what must happen in order for it to spur demand and to cause inflation. They are pushing on a string

    Check out the chart of M0… (currency + demand deposits)

    http://research.stlouisfed.org/fred2/data/BASE_Max_630_378.png

    and this chart of deposits in excess of reserves…

    http://research.stlouisfed.org/fred2/data/EXCRESNS_Max_630_378.png

    Notice any similarities? The monetary policy decisions of the fed have had no effect on demand, because banks are holding all the cash.

    In the current environment, the fed would have to print money, take stacks of $100’s and mail them to everyone in the country in order to spur demand that would cause inflation. Velocity of money is close to zero

  22. 22
    CostcoMike says:

    RE: Scotsman @ 19

    “Got too much debt? You’re screewed, as there is NO easy way out. Welcome the coming depression . ”

    This got me thinking. How much debt to income could a person have if we go through a “depression” and still survive? Looking at say a family of 4 what is the brink of self sustaining income and debt and what would put you in a shelter or on the street? Thoughts?

  23. 23
    Herman says:

    First of all, the recession is clearly ending. Just look at the market this week. The market is the #1 leading indicator of the economy, and I might add is also the most powerful referendum on confidence and support for the President.

    I’m surprised this hasn’t been raised yet.

    With irregards to printing money, I don’t think we are covering it on enough depth. Check out some economist blogs and you’ll see posts about how it’s being done. The fed and treasury do really weird things like loan and buy assets from each other that I don’t fully grasp. But the sense I’ve been left with is that the equivalent of money printing is indeed happening, and that there have been some recent and dramatic changes in the way the fed and treasury interact.

  24. 24
    Scotsman says:

    Hi Robert-

    You’re right, in a very real sense they are printing. But all money is not the same as currency, and printing isn’t the same as expanding or contracting the money supply. The variable we haven’t talked about is the velocity of money, or how quickly it changes hands from one transaction to another instead if, say, hiding under a mattress.

    The Fed tracks the velocity of money by comparing the amount of currency in circulation with the level of economic activity/transactions taking place. Right now the velocity is down, which means the effective money supply is down, which is deflationary. By printing or monetizing, the Fed could substitute currency for velocity in an attempt to maintain a relatively constant supply of money/debt., and hence prices. By doing so they could cushion the fall, but really can’t print currency fast enough to replace the falling velocity and contracting debt. Remember, the total currency in circulation is only about $450 billion paper dollars (actually in the U.S.) verses an economy of about $14 trillion. Most of our money is really either debt or electronic zeros, and printing doesn’t help much there.

    As designed, our monetary system is sort of like our political system. As governmental power is split between the house, congress, the courts, the executive, and the states with all their checks and balances, monetary power is split between the government, the Fed, the bond market, and the consumers- both individual and corporate. Over time, they strike a balance that works, one that provides an environment for growth and sustainability to the benefit of all. But when distortions occur, the various players step in to effect corrections.

    Got bubble? The consumer, the government, all have to much debt. They look for the easy way out, but the markets in general and more specifically the bond markets and banks say “sorry- no more.” And while one entity or another can attempt to tweak here or there, others limit the available possible moves given ALL have to continue to exist in the resultant environment.

    There are lots of interesting plays to discuss, but very few long term possibilities that allow for systemic stability and continuity. Ruling out the suicidal dramatic plays, like monetization, we’re left with having to take our medicine. The good news is we will get better if we don’t overdose on one expedient or another.

  25. 25
    deejayoh says:

    By Herman @ 23:

    First of all, the recession is clearly ending. Just look at the market this week. The market is the #1 leading indicator of the economy, and I might add is also the most powerful referendum on confidence and support for the President.

    I’m surprised this hasn’t been raised yet.

    With irregards to printing money, I don’t think we are covering it on enough depth. Check out some economist blogs and you’ll see posts about how it’s being done. The fed and treasury do really weird things like loan and buy assets from each other that I don’t fully grasp. But the sense I’ve been left with is that the equivalent of money printing is indeed happening, and that there have been some recent and dramatic changes in the way the fed and treasury interact.

    I sure hope that is sarcasm…

  26. 26
    Scotsman says:

    RE: deejayoh @ 24

    Yup- I’m not touching that one!

  27. 27
    Angie says:

    Eventually, if they want to survive, they need to play clean. It’s the difference between process and results, and results dominate in the end.

    On that we are in complete agreement. Like I said in the other thread, Mother Nature bats last, ever and always. (You’re going to eat your words about global warming by the time you shuffle off this mortal coil, BTW. Keep your eye on ocean temperatures and remember that they cover 70% of the surface of the planet.)

    Anyhow, drug companies encounter this kind of situation time and time again *specifically because* they’re doing science for profit and so much money is on the line. I had a front-row seat as a situation almost identical to this unfolded at the clinical research center where I worked in the early ’90s.

    This diversion arose from a discussion of the validity of economics as a science. Choose your definition of the field however you like, but the vast majority of the brainiacs–in finance and beyond–that caused capitalism to eat itself alive didn’t major in Romance Languages or Biochemistry. Dr. Friedman and the Chicago School are finally being shown to be the stooges they’ve been all along.

  28. 28
    David Losh says:

    Funny,

    The Fed, the money supply, the banks, and stock market have been over played these past couple of years. China is a bit player here trying to be important when they have much more sever problems of thier own. Obama said it best; he has more important things to do than to deal with the bail out that George started. George is an idiot who was in way over his head as President.

    The task our government has at hand is regaining foriegn policy credibility.

    The question is if we can pay the debts we are creating. Obama says yes, and I believe that. If we had more global cooperation there is every reason to believe that we can create wealth and prosperity.

    NAFTA has been over shadowed by the banking system accounting tricks. If North America could create an economic union there would be no stopping us. If South America could cooperate with North America we would certainly be a world mega power economically.

    Foriegn ploicy is where the rubber will meet the road.

  29. 29
    Kary L. Krismer says:

    RE: Robert @ 10 – Actual hard currency (printed dollars) is a small percentage of currency in circulation. Perhaps others have access to the stats. The government can control how much currency is in circulation by controlling bank reserves. Money in banks has a multiplier effect due to lending.

  30. 30
    David Losh says:

    RE: deejayoh @ 21

    I missed this before. Yes there is tons of cash sitting in the system, it’s being held hostage.

    It will be a matter of who blinks first. The government is throwing money at the banks, and States, and corporations for nothing. It’s all going into cash reserves unless there is a solid, no risk profit to be made.

    In my opinion it’s up to the consumers to by pass the system. We can survive with very little. We can barter, exchange our own community dollars, buy direct from local merchants, and by pass the McDonald’s, Sam’s Club, Bank of America, or creating any more debt.

    If consumer spending is the GDP then if the consumer stops spending, or only spends cash within the community, then the system loses.

  31. 31
    The Tim says:

    By Herman @ 23:

    First of all, the recession is clearly ending. Just look at the market this week. The market is the #1 leading indicator of the economy, and I might add is also the most powerful referendum on confidence and support for the President.

    I’m surprised this hasn’t been raised yet.

    I’m assuming this is 100% sarcasm. Despite that, I couldn’t help but make this:

  32. 32
    Angie says:

    Now for something completely different: Tim (or any other moderators), there’s an unofficial Seattle Bubble meetup this Sunday, March 15th 11AM at the
    Columbia City Bakery (4865 Rainier Avenue South, Seattle). Would it be possible to put a blurb about it somewhere visible?

    A few folks with interest in SE Seattle will be there and it’d be great to put more faces to names. There’ll be a sign on the table and perhaps afterward an auto tour of the good, the bad, and the ugly of the south end for folks who are interested…

  33. 33
    Herman says:

    RE: The Tim @ 31
    It was indeed. The first half of my comment was a strawman. But I am surprised the rally-o-the-week hasn’t been put in context until just now (your graph).

  34. 34
    Herman says:

    If I remember correctly, the principle focus of the Fed is supposed to be on inflation. They want policy to keep inflation at about, say, 2% or so. And the principle focus of the Treasury is on ensuring an adequate money supply. (I’m not talking about paper bills – that’s a very small portion of “money”)

    Sometimes banks start to run out of “money” so the treasury is there to inject it. Once again I’m trying to reconstruct this from memory so I’d appreciate some help… but I think it works like this.

    The Treasury, strangely enough, buys US Government bonds from the Fed and maintains a pool of them. It earns interest on those bonds, which in some crazy way it winds up refunding to the US government, since it’s a case where the government has loaned money to itself. Since the Treasury is where all money comes from, it can buy as many bonds as it wants just by creating the “money” to do so.

    The Treasury likes to maintain a pool of bonds so that it can sell them to banks when it wants to REDUCE the money supply, or buy them from banks when it wants to INJECT the banks with money. And so this goes on under normal circumstances in a routine ebb and flow and nobody really cares about it.

    Now here’s where I really don’t remember what I read, but the point was that some REALLY crazy stuff happened recently. Like, instead of buying US Bonds from the banks, the Treasury has been injecting the banks/FNMA with cash by BUYING OTHER TYPES OF BONDS. Maybe that’s corporate bonds, mortgage-backed assets, Citi-issued bonds, etc. It had never done this before. And they can do this without any congressional approval.

    So while you hear all about $780B in stimulus appropriations that were debated and funded by borrowing (new bonds), you hear almost nothing about the $2T or so that the Treasury simply fabricated and used to buy bank assets (aka bailout money). Partly that’s because the $780B is officially new debt, while the $2T is a zero-sum exchange because they simply traded dollars for an equal amount of bond debt.

    But this ignores a risk factor. The treasury has fabricated a lot of money and used it to buy risky assets in some kind of perverse bailout/guarantee situation. That puts the treasury/taxpayer on the hook for a lot of risk in the treasury that it never had before.

    The question is, what happens when some of those bond assets stop performing and default. In that case the Treasury starts taking losses and its books won’t balance — uh oh. So what must the Treasury do when that happens? Start the “presses” and make up the difference! That’s why I’m a believer in a big risk of inflation.

    There’s more to this story having to do with the ability and willingness to reign in money supply under our current conditions, but I’ve written so much that I should stop now.

  35. 35
    stephen says:

    well eventually it will be :-)
    RE: The Tim @ 31

  36. 36
    Mikal says:

    RE: Scotsman @ 19 – Except they are so under water that it might help them.

  37. 37
    Kary L. Krismer says:

    Did anyone know that very old Time Magazine articles are on the web? I found this one from 1935 discussion automobile financing, etc. during the depression.

    http://www.time.com/time/magazine/article/0,9171,771812,00.html

  38. 38
    bob says:

    From what I’ve read, it is now harder to qualify for a mortgage (one now needs a down-payment and a job). But is it that much harder than it was before the credit crunch? …enough to remove many from the buying pool? I haven’t heard this discussed on SB yet.

    I also ask because I’m surprised by many of the new listings. My first impression is always, this is priced too high. My second impression, who is going to qualify for that note?

    thanks

  39. 39
    TheHulk says:

    By The Tim @ 31

    Ha ha, If people are watching CNBC and deciding that the recession is over because Cramer and co. said so, I would urge them to put their money where their mouth is. Seriously, put all your money, every single cent you have into the great Stock market. After all, the recession is over and you will see ginormous gains in a single year.

    Herman@23, Take a look at this graph – http://dshort.com/charts/bears-nominal-real.html?four-bears-real

    Do you see where we are right now? In spite of the “great week” we had last week, this is STILL the worst bear market in around 80 years. Now, look at the light grey line, below which our current blue line is shown. That grey line shows the era around the great depression. Another thing these graphs unfortunately do not show is how long the “real recovery” took from the “real bottom”. For instance, did you know that it took the dow did not reach the highs it saw in 1929 for another 25 years?

    This is only the beginning, there are plenty of false bottoms along the way. That is however for the stock market.

    The housing market will continue it sticky slide downward. Herman, be frank, when did you purchase your house? 2004? 2005? You are just about keeping afloat right now. If you are smart, get out while you can. After one more year you will be competing with 2003/2004 prices.

  40. 40
    Kary L. Krismer says:

    By bob @ 38:

    From what I’ve read, it is now harder to qualify for a mortgage (one now needs a down-payment and a job). But is it that much harder than it was before the credit crunch? …enough to remove many from the buying pool? I haven’t heard this discussed on SB yet.

    I’ve mentioned that quite a bit. It’s not that much harder. You need 3.5% down rather than 0 (unless you’re VA, in which case 0 still works.) The main difference for people with decent credit (I think either 620 or 650) is the amount they will lend you is less. That’s actually a good thing. Before it was fairly standard advice not to borrow everything that you qualified for. Now that advice isn’t as necessary, although it still might be prudent advice.

    The main places where credit isn’t available is commercial and consumer (non-residence).

  41. 41
    Kary L. Krismer says:

    Did anyone else catch the news yesterday about the fire somewhere in South Sound that jumped from house to house because of the small setbacks and vinyl siding? I think three or four houses actually caught fire from one another, and some others were damaged.

    Two things I don’t like are small setbacks and vinyl siding. Together they’re really bad.

  42. 42
    bob says:

    Thank you Kary for your response.

    I have identified a property I like. I am going to fax the listing agent my offer:
    – cash offer to expire next business day
    – closing at seller’s convenience
    – 10 day inspection period
    – local, reputable title co.
    – 10% ernest money to be held by title co
    – 3% buyers agent/broker fee to be returned to seller

    What else should I add/subtract from my offer?

    thank you

  43. 43
    Kary L. Krismer says:

    Bob, at a minimum, quite frankly you’d need a financing contingency and form 22 NFW (No F’n Way) that allows you to back out if there’s a foreclosure within 20 days of your closing, and a legal description. 10% is probably way too high of an earnest money. And you should use the statewide forms, otherwise the listing agent might feel compelled to send their client to an attorney to review. Finally, one day might be too short if they do that, or if the sellers are out of town (you can call the agent to find out, and also find out what kind of closing date they would prefer).

    The best offers from the seller’s point of view also need Form 17 and lead based paint (on an older house) signed off on.

    I’m not sure you can actually accomplish that last part (commission) with certainty. When we were looking the only time we took the commission off the table was when the seller was the agent. You might want to consider a rebate broker instead.

  44. 44
    Kary L. Krismer says:

    FYI, closed and pending volume in King County (SFR) is looking stronger so far this month (as it should since it is March), and the median is holding up, but the list price on pendings is still way down. Some day that will push over into the closed median. I think we’re seeing some bargain hunter/investors picking up the cheapest properties.

  45. 45
    bob says:

    Thank you for your response Kary.

  46. 46
    Kary L. Krismer says:

    You might also consider using an attorney to draft the documents. I have a couple I could refer you to. But again there you risk the seller using their own attorney if your attorney does not use the statewide forms.

    BTW, the use of Form 22-NFW and the listing agent referring their client to an attorney is I believe the standard advice given by Annie Fitzsimmons, an attorney who answers legal questions posed by agents. Not all agents follow that advice (or are even aware of who Annie Fitsimmons is). I actually paid an attorney some money to help me strengthen Form 22NFW.

  47. 47
    What the Heck says:

    RE: Kary L. Krismer @ 46

    Kary. I have a question regarding FSBO. If I sell the house to a buyer with an agent and agree to pay any buyer’s agent a commission (say 2%-2 1/2%), does that agent technically work for me now? What is the fiduciary responsibility of the buyer’s agent in that type of transaction. Any explanation or thoughts would be appreciated. Thank you.

  48. 48
    Kary L. Krismer says:

    RE: What the Heck @ 47 – No, the agent most likely would represent the buyer. The default is the agent represents the buyer, and the major exception is where the agent has a signed listing agreement with the owner. Thus where an unrepresented buyer looks at a property using the listing agent, that agent represents only the seller, unless they also have a signed agency agreement with the buyer.

    The old rule followed the money, and it made no sense. You could have an agent show a buyer 20 houses, where the agent had no connection whatsoever to any of the 20 agents or sellers (except being a member of an MLS), and the agent was deemed to be the seller’s agent because the seller paid the money. Clearly not what the consumer would think would be the case.

  49. 49
    David Losh says:

    RE: What the Heck @ 47

    The seller is selling something and the buyer brings the money to the transaction. When the money leaves the buyer’s hands it get paid to different people in escrow.

    The buyer pays his agent first, then escrow, title, fees to the lender, and so on. The seller is the last person to get paid by the buyer. The seller gets the remainder of the money.

    Once the seller gets the money they pay thier agent first, then escrow, title, and any other fees.

    The series of payment is important for rebates. If there is a commission rebate the money needs to be in line, in order to be paid out to help close the transaction.

  50. 50
    David Losh says:

    RE: bob @ 42

    This is not a forum for legal advice.

    Nothing any one tells you here should constitute legal advice. Your situation is unique..

    If I were guessing I would think the offer is low and agents have turned you down before. Agents have turned down my low offers in the past only to have them look really good in a couple of months.

    You can write a Purchase and Sale Agreement on a cock tail napkin and have it be enforceable. The forms mainly protect the agents. The State of Washington is an Agency State. We use Real Estate agents rather than lawyers. Lawyers have confined Real Estate Agents to filling out boiler plate forms.

    To make your case to a seller who has an agent you have to appease the agent. Your transaction needs to make sense to the agent and the agent has to be able to follow what you are trying to do.

    You have presented a classic book formula for making a cash offer.

    Any agent in business for more than twenty years will recognize this as an attempt to establish dominance in the transaction.

    Your sequence becomes obvious at number four the local title company. You want to inspect title first. It will tell you a lot and it also contains the Exhibit A legal description you will need in order to make an offer in the State of Washington.

    Second you want to determine escrow and probably have that done in an attorneys office. Escrow holds the funds. You do not want the title company to be your escrow, they are incompetent.

    Last, but not least you will want an attorney to review anything that comes back to you. It’s an offer, counter offer. The selling agent will have to respond by a counter offer.

    I know you’re thinking it’s a take it or leave it, it’s cash, and you’re good for it, but IF I were the agent representing a seller I would want to see the cash.

    All in all IF I had cash I would pay the 3% for competent representation. Find the best agent you can to present the offer. If you’re serious, if you are a serious buyer, you should be able to convince a buyer’s agent of that.

  51. 51
    David Losh says:

    RE: Kary L. Krismer @ 48

    Kary, I think you’re falling into a trap here. I keep in mind these things are in writing.

  52. 52
    Kary L. Krismer says:

    RE: David Losh @ 50 – Thank you for adding the not legal advice disclaimer. Each situation is different, and each property is different.

    One other thing. An agent could possibly give you a better feel for what the seller might be likely to accept. Many buyers think in terms of 10 or 20% off list, etc. You could have two identical properties listed for $400,000, but one of the two the seller might be less likely to go under even $380,000 than the other.

  53. 53
    Kary L. Krismer says:

    While it’s less important now where there are fewer buyers, many people don’t realize that the quality of the form of the offer is an important consideration for sellers. This is largely a reflection of the buyer’s agent in most situations.

    A well written offer is more likely to be accepted than one where it’s clear the person (typically agent) doesn’t know what they’re doing. Just as an example, if the agent doesn’t know how to write a proper offer, what’s the chance that they know a decent mortgage broker to refer their client to? While I’ve certainly had well written offers get into some sort of difficulty during the closing process, the chance of that happening seems to be much greater where the initial offer is poorly drafted.

    In markets that are a bit hotter, that might result in your offer not being accepted (or countered) instead of another offer. But even in this market it might be less likely that your offer is accepted for a given dollar amount. Of course, there are sellers that are so desperate they’d accept an offer in any form.

  54. 54
    Ray Pepper says:

    RE: Kary L. Krismer @ 53

    Haaa. Sellers I meet in Gig Harbor and Puyallup would be willing to take offers written on toilet paper.

    What I still find fascinating is some Agents still use bullet points and offers are handwritten. I mean come on!! Our boiler point MLS forms should all be done on-line for clarity, emailing, and professionalism. Stop faxing and writing those offers!!

  55. 55
    Kary L. Krismer says:

    RE: Ray Pepper @ 54 – I agree on the handwritten and faxing points. Yes at some point it probably will need to be faxed to one broker, but it doesn’t need to be faxed back and forth repeatedly. There are ways around that.

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