Ever the optimist

Tom Layson - Opinion


I've made a couple of correct predictions this year in this forum and others for which I write. While there is some limited satisfaction in that, I'm also struck by the fact that it's only my downside foresight that seems to work. I'm sure that would change the second I started short-selling.



With that said, the raid on retirement savings and the breathless marketing of reverse mortgages has begun. Those two pots of gold represent the last fertile field for the equity strippers. I mixed that metaphor in triplicate.



The long term damage that can be done by stripping away America's 401-k and home equity can't be overstated. Taken to its fullest extent, today's equity stripping in a recession could lead to tomorrow's descent into a depression.



We all seem to think we're too sophisticated and that securitization and the science of "finance" have insulated us from a cataclysmic economic crash. I don't think that's true. The dry rot of debt, demographics, the social instability caused by the increasing stratification of wealth and a decline in educational standards could all easily conspire to re-ignite the specter of depression.



This is particularly true as the baby boom retires and is forced to tap savings and home equity prematurely - well beyond its ability to provide an income stream in the context of ever-lengthening life expectancies. It's a recipe for disaster and I truly think we might look back at the turn of the century bubbles, the end of the age of oil, and the final tapping of end-of-the-line financial resources as the beginning of a new economic paradigm to the downside.



I hope I'm wrong.



In the meantime though, the message is this: Protect your long term equity at all costs. If not tapping your 401-k means defaulting on your zero-down home loan and walking away, do it. If your choice is between paying off credit cards or making a house payment where there is equity to protect – do it.



In other words, do your best to avoid tapping your last remaining real assets for any short term need. First of all, chances are the short term need won't be as bad as the need you'll face when your assets were supposed to kick-in. Secondly, chances are the solution to your short term problem will only clear a path toward your next short term problem. Our fixes to cash flow issues are structural and have to be addressed that way. Our notion of the consumer society is going to change, and you're going to see a lot of the window dressing fall away.



I still think I'm a long term bull, but I'm not as sure as I used to be about that. I'm still long across the board, but that may only be based on a dim hope of a brighter future. That's one prediction I hope I'm right about.



In the meantime, we all have to hang on to our real assets with both hands.

Fool for the city

By Tom Layson – Opinion

Windermere Puyallup/Canyon Road and Tacoma Pacific Commons designated broker Joe Maxwell says, “When things contract, they head back to the city.” Maxwell was commenting about the slow real estate market, and the trend he’s seeing as people look for properties closer to the region’s employment hubs.

It speaks to a larger story.

Flung far out beyond this market’s Seattle core is the sprawl that became our version of the Pacific Northwest.

Back in the day, Lake City, Wallingford and Ravenna used to be Seattle’s suburban outskirts. It grew to Kent, Renton, Bellevue and Lynnwood and we started to think that sprawl was getting out of control. Today, the Seattle commute has spread to Eatonville, Wenatchee and Marysville and everything in between. It is a metroplex stretching from Olympia to Sedro-Woolley with no meaningful mass transit system and another million people due to flood in over the course of the next 20 years.

There’s a problem though: Energy.

Driving out through the architecturally sterile subdivisions of Pierce, King and Snohomish counties where tens of thousands drive an hour or more to a cubicle in Seattle or the east side – you have to wonder how long it’s going to last, and what it means when it comes to home values in the suburbs and the exburbs. We have one of the worst commutes in the nation, and it’s going to get a lot worse before it gets better.

The deal we all made originally when we moved “out” was to trade our time on the road for the larger paycheck that came in Seattle or Bellevue. The other option was to take a smaller paycheck in Tacoma and scale or lives accordingly.

But the economics of the time-for-money tradeoff are starting to turn.

The problem is that suburbanites and exurbanites are starting to lose both time and money as gasoline and energy costs make the old trade off less and less attractive.

Yes, the suburban home is newer and more energy efficient, but it’s also much larger and further from income. And yes, the costs associated with living in the city are greater, but you get your time back. The equation isn’t the no-brainer it used to be. I’m not saying suburban living no longer makes sense, I’m just saying reasonable people can start to disagree about the value of the old tradeoff.

There are a couple of takeaways here.

The first is that it might make sense to re-think any idea you might have about pushing the boundaries of this market’s already insane commute. You might not hold up emotionally and physically over time in a truly grueling commute with little chance of a fix in your lifetime. In addition, you might be investing in a home with little hope of serious appreciation over time as we infill develop our way back to the central city.

It takes us back to the oldest maxim in real estate: Location, location, location.

If you are going to live in the hinterlands of Pierce and Snohomish counties, think about your property’s proximity to freeways and the likely expansion of commuter services. There are substantial differences in neighboring communities when it comes to access to transportation. I believe that subtle differences in location, even in the far flung suburbs, is going to start to matter more and more.

And finally, there is a huge opportunity here for economic development for the population centers outside the central city. When Russell talked about moving the Seattle, I laughed out loud. It was never going to happen.

In fact, I think there is an increasingly good opportunity for the economic development gurus of Pierce, Thurston, Kitsap, and Snohomish counties to sell a different version of, “The Northwest” without the grief and costs associated with locating in King county.

Will it happen? I wonder.

If it does, the owner of the 2,200 hundred square foot, 3 bedroom, 2.5 bath tract home somewhere down South Meridian or up The Bothell Everett Highway may not be as far “out” as they were afraid they were.

If it doesn’t, it may have the effect of moving those homes farther and farther away as the growing costs associated with energy and time tend to shrink the map back around Seattle.

How time doesn't fly

Tom Layson - Opinion

It feels like the slowdown in real estate has been happening for years. And in fact, it has been. I remember being in a panic to sell my house in New Jersey in April of 2006 because we had decided to make a life change, and I knew an end of the housing bubble was coming. Days on market was already starting to balloon, and there was downward pressure on prices. It was one of the things that drove our timing.

But the market was only starting its long decline, and what's interesting is that the most important indicator, price, actually continued to increase here in the Pacific Northwest until the middle of last year! If you asked most people when the housing market started to turn in a meaningful way (price), they would probably pick a date further back than July of last year.

Yes, market fundamentals were in decline long before that when you consider days on market, inventory levels and other factors. But again, price is the magic number, and prices were increasing here even though the rest of the world was talking about a down market for a year or more prior to July of 2007. What that tells us us that local sellers had yet to capitulate. The Northwest was going to be different. Sellers hung on, raising the median price sold even though the number of deals plummeted and the inventory ballooned.

Now though, the market is finally responding and prices are coming down while affordability improves. As it turns out, the Northwest is different. Our jobs picture remains strong and our long-term population trend is for growth. So that raises the question, how much lower can bargain-hunting buyers sit on the fence? We didn't have the runup the sunbelt states did, and we're not going to crash like they did either. My feeling is that at most we may have another five percent to go on price declines, but the price of money (interest rates) and a decline in the quality of the selection are starting to balance the scales against considerations that focus on price exclusively.

I did some work on Trendgraphix to look at the maximum price decline by county. That means comparing prices from July of last year, to May of this year. Here are the numbers:

Median Price sold from July 2007 peak

King: -7%
Pierce: -8%
Kitsap: -6%
Thurston: -4%
Snohomish: -6%

This is very general of course. Some zip codes have experienced no price declines at all, nor will they. Some have fared much worse. All real estate is hyper-local. But looking at the broad strokes I come to a couple of conclusions. We've only spent a year unwinding a bubble that took several years to form, and that's not bad considering the relatively orderly process we've enjoyed here in the Northwest.

I also think we'll spend another year finishing the process when we look at price alone. What I'm watching now is the game of chicken between sales volume and median price and interest rates. Those are the two camps pitted against each other - and as I've shown in previous blogs, it makes sense to place your bet on interest rates right now and get the best house available this summer. The cost-to-benefit ratio of holding out for the last few percentage points on price is making less and less sense.

Time to pull the trigger?

Tom Layson - Opinion

Home prices, like the value measure of any other asset, go up and down. If they go up too fast, they will eventually "revert to the mean" - possibly by dropping below the mean for a period of time. If the trend line were perfect, generally speaking, houses would appreciate at about the rate of inflation every year.

If you were to buy a house today here in the Pacific Northwest, you might see its value drop another ten percent before the market starts to head north again. How devastating is taking a paper loss on a house?

Well, if you're going to be in the house for a year - it's pretty bad. If you're going to be in the house 10 years, it's not as important.

What IS important however is the cost of money you use to pay for the house. In other words, fluctuations in price may be far outweighed by considerations of the interest rate.

Say buyers are looking at a median $218,900 house with 20% down and a 30-year fixed rate mortgage at 5.5.%. Their monthly payment is $994.31.

Now, let's say that house drops an additional 10-percent to $197,010. If the interest rate moves up to just 6% on the note, that monthly payment comes in at (drum roll): $994.94.

Interest rates are now heading back north of 6% with more to come. Doing that calculation with interest rates at 6.5, 7, 7.5 or 8 percent really changes things drastically.

It gets even MORE dramatic if you start moving the total costs out 10 or 20 or 30 years. At that point, the extra money you paid for the house is FAR outweighed by the money you've saved by locking in a lower interest rate.

My point is this: A lot of freaked-out buyers are focusing on the wrong thing. I would take a 5.5% or 6% interest rate any day on a house I liked, even if a 5 or 10 percent price drop were in the cards for the next year or two.

Of course - the key to that is being in the house for a while. If you're a flipper, or somebody who is going to be leaving quickly - a buy doesn't pencil out in this market. And frankly, that's good for everybody else.

So the bottom line is this: Is it worth living in the apartment for another year waiting for another five or 10-percent to come out of a home's price as interest rates rise? Is it worth putting off the equity building process? Are you sure prices have another five or 10-percent to drop? Will the houses or the neighborhoods you want be available in the future?

Something to think about.

Are we there yet?

By Tom Layson - Opinion

An interesting thing is happening in the media right now. I’ve felt myself do this several times over the years, and yes, it’s the chicken’s way out.

The media are calling a bottom to the real estate market right now, without calling a bottom. What?

Well, the idea is to do stories about how others are saying we may be at a bottom. Another strategy is to allow columnists to do independent work calling a bottom. That way, when the editorial staffs finally work up the courage to call a bottom – and they’re always late calling bottoms and tops – they can cite their previous “work” with the old, “As we first reported in April” line leading into their content.

Right now, all the media I’m seeing is dancing around calling a bottom. It’s being written about, discussed, debated and pondered. Is it a bottom? Who the heck knows? The point is that it is being discussed, and again, we won’t know we were there until we look in the rear view mirror to see it. The Wall Street Journal, CNBC, the San Jose Mercury News have all speculated on a market bottom without really calling it.

Here in the Northwest, employment remains strong, home prices are hanging in there, and rents are up pretty sharply. I’m just waiting for the Time magazine cover that talks about how the real estate market will never come back – and then we’ll know we’ve passed the bottom.

I continue to believe that the real focus for buyers right now should be interest rates. Listen, buy a house or not – it’s your life. But if you DO want to get out of that apartment and start building some equity, you simply must consider the cost of money – not just the price of the house. This is something the bubble-heads keep ignoring.

I am really afraid that a lot of buyers have had the pants scared off of them, and are not in the game when they need to be. They’ll either miss their shot at getting into a home, or stretch too far and overpay for money if they try to catch the train as it’s leaving the station – leaving them just as vulnerable to a default as the sub-prime crowd was.

When the government reports inflation minus food and energy – it is a lie. Inflation isn’t what the government says it should be, it’s the real world impact it has on your wallet. The Fed’s primary mandate is “price stability” which means inflation. They can NOT let the money flow forever if they are going to keep inflation in check and stop this wicked cycle of bubble-creation we’ve been trapped in for the past decade as too much of the world’s money chases too few returns.

If you don’t understand this, ask a Realtor. It is vital that buyers understand the impact even a half-percent interest rate hike can have on their monthly payments, and total cost of financing.

Son - be a deadbeat!

Tom Layson - Opinion

I was having a conversation the other day with one of my kids about credit cards versus debit cards.

On the positive side, he has a fear of the damage that can be done with a credit card. On the negative side, his fear is irrational.

Credit cards are like guns: The only kill if somebody pulls the trigger.

The bottom line lesson was this: Any time money passes through your hands, you should get something for it. That's how credit cards are best employed - to pay for things while taking the "spiff" off the card, like airline miles, or whatever.

The credit card industry calls people who take advantage of a card's benefits and convenience without paying rolling finance charges, "Deadbeats." So, be a deadbeat!

Credit cards give you convenience, time to pay while you collect interest, fraud protection, purchase protection, the ability to charge back for services not rendered, and benefits. These things are only good however if you're not paying their exorbitant interest rates.

Debit cards carry none of these benefits - although they're trying to beef-up fraud protection and other features to compete. Still though, they're an inferior product.

Yes, you need your bank's debit card to access the ATM, but that's about it. I also suggest using no fee ATMs like BECU's machines located outside Top Foods and Fred Meyer. Their goal here is to stimulate a little more buying by having a no fee cash machine in the vicinity - but again, there's no law that says you have to drain your checking account to buy Twinkies.

If you do have to pay a fee on an ATM withdrawal, make sure you take out enough cash to make the fee a small percentage of the take. In other words, a two dollar fee on 20 dollars is a ten percent rip! A two dollar fee on a 200 dollar withdrawal is a 1% rip, which you can live with if necessary.

So use the credit card. Build your credit history, have access to credit, keep your debt-to-credit ratio low, and pay off every month while collecting the benefits!

It's good to be a deadbeat.

Raging against the mortgage machine

By Tom Layson - Opinion

There is something new out there on the horizon, and it's something anybody buying a mortgage has to be aware of.

It used to be that if you had a certain credit score, you were offered a certain interest rate. Well not any longer. In an effort to extract maximum value from the consumer, the mortgage industry is now applying sophisticated computer models to see what the market will bear.

Qualify under today's system for a 5.5% 30-year fixed rate mortgage? Well under the new model, you'll be offered a 5.9% mortgage first to see if you're stupid enough to bite.

Depending on your demographic status, pattern of past consumption and other factors - the lender may very well choose you to see if you'll be dumb before you're offered the chance to be smart. Swell.

The Wall Street Journal did a story about this, but like all news stories, it lacked the outrage that this practice is sure to engender. Bankers figure that by using this price optimization program, they can boost bottom line profits by 5-10% in six months.

Wachovia and WaMu are said to be using an existing price optimization software tool now, and Citibank is developing an in-house version of this technology.

The Wall Street Journal piece says that banks have found that loyal customers are often more likely to accept a high rate. The message here: Shop like a fiend for home mortgages.

At least your FICO score was an attempt at an objective measure of creditworthiness. Now, it's all about taking a crack at somebody just to see if they're dumb enough to pay.

Fight back and shop hard.

The next big thing?

Tom Layson - Opinion

Home values down, equity tapped. American consumers, especially those who are at the end of their earning years with little to show for it, have to find another piggy bank to tap - and quick!
For the younger crowd: The new idea is to raid the 401-k. We've covered that.

But for those who are a little older, I see the debt industry cranking-up to pursue another business model with a vengeance: The reverse mortgage.

Yes, there's a little buzz out there now, but I think media saturation and hard sell marketing is on the way like we've never seen before as it relates to this product.

I wouldn't be surprised to see a new division of Countrywide and a whole group of "new" players working to enter the reverse mortgage market as the quest for the last pot of gold ensues.
I also have a sneaking suspicion that regulators will capitulate to the industry and loosen the reigns on age restrictions and loan features.

While I don't have any hard numbers on this, the word on the street is that brokers are being retrained and office space is being acquired specifically to serve the reverse mortgage marketplace.

It seems that about 30-percent of all U.S. home owning households have no mortgage. That's a huge market representing who-knows-how-many billions of dollars of equity ready to strip. If somebody came up with a number on this, it might prove interesting.

Consumers need to know that the costs of reverse mortgages are high, and that there may be nothing left at the end of the game.

Are reverse mortgages right for some people? Sure. Are they right for as many people are going to be pushed into them soon? Nope.

Are you in the mortgage industry? What do you see happening in your office? I'd like to get your input.

State of the Port

By Tom Layson - Opinion

I was at the Port of Tacoma's, "State of the Port" meeting earlier this week at the Murano in downtown Tacoma.

While I would like to write about the dismal media presentation I saw and my mounds of advice as a communications consultant and content producer, I'll stick to something the rest of us care about with equal passion - the state of local business.

I think the most important thing I heard Executive Director Tim Farrell say is how the weak dollar is a major boon for the port. Yes, we have a great counter-cyclical play on the weak dollar sitting right here in River City.

Farrell said that every container that comes in full these days -goes back out full. That blew me away. In my mind all I could think was, "It's about time."

So - that's my tidbit for the week.

If you have items of local interest to post - we're going to want to hear about them soon when we launch a community blog at Windermere Puyallup/Canyon Road.

The new math

Tom Layson - Opinion
As published in the Puyallup Herald

The kid at the Kirspy Kreme donut shop just next door to the South Hill Mall looked at me like I was from another planet.

I could tell our transaction was off to a bad start when I handed him a $100 bill to pay for a dozen donuts costing $7.89. Paying cash makes one pretty suspicious to begin with, but the $100 bill required a special viewing against strong back light, and the secret marker test.

As he punched-in the total and the amount I handed him, the computer dutifully spit out the difference. But a simple calculation of the difference does not a satisfactory transaction make. No, I asked him to count my change back, “Old school.” He had no idea what I was talking about and looked like he was about ready to call 9-1-1.

If you own a business or mentor young people, please teach them how to count back change. As simple as it sounds, this basic form of financial education is part of a broad array of life skills that are just slipping through the cracks, especially when it comes to managing and understanding money.

The kid who can’t count back change will be the same adult who doesn’t catch all the meaningless and punitive fees or errors on his or her billing statements. He or she may be the same person likely to sign a mortgage contract they can never hope to fulfill. He or she may be the corporate manager who decides to buy the next generation’s financially engineered pig-in-a-poke - just as this generation’s brightest lights and fell victim to the lure of “securitization” and bought and sold financial products they didn’t understand in the prelude to the sub-prime mortgage meltdown.

The point is that financial education starts young. If you’ve been a market timing, fee paying, buy-high-sell-low, over leveraged and under-saved adult – you are a dangerous influence on the young people who watch you operate that way. The safety net can only be deployed so many times, and as debt and demographics eat away at the strength of the net, the stakes for screwing up will likely only become more severe as time goes on.

So teach you kid how to count back change, and take charge of their financial educations. There’s a very good chance you’ll learn a lot in the process too.

How financial literacy continues to be so glaringly absent from our school’s curriculums is one of public life’s greatest mysteries. The cynical explanation might be that too much financial education in the wrong hands doesn’t play well with the powers-that-be. No matter what the reason though, it’s something parents, kids, teachers and lawmakers need to start demanding.

It’s the only way to make it in a world where a dozen donuts costs $7.89.

The sky is falling: Me thinks not

Opinion - Tom Layson

Just about every data-provider's numbers, and every subsequent media report focuses on the decline in home values - and median prices. The almost daily, breathless tone of some the reporting is enought to make you think the sky is falling, or that falling prices are not a good thing.

Listen: To be a successful home buyer, you have to embrace the idea that falling prices are good. You have this attitude when it comes to EVERY other class of consumer good, but not for real estate?

Part of the blame for this lies at the feet of the real estate industry itself: Selling the idea that all homes are investments that never depreciate. Part of the blame lies at the feet of the consumer (of which members of the media are part) who has come to realize that the only skin they have in the game is the equity they have in their homes.

When your entire investment portfolio depends on the permanent appreciation of one asset, in one city, in one county, in one state, in one country - you are not diversified, and likely to see your home is a stock-ticker and investment rather than a tax-advantaged shelter. Mistake. It's why home owners can't adjust to changing market conditions sometimes if they want to sell.

So what about declining prices? Well, price is the only button today's seller can push. Good homes, in good locations with good prices will sell. Not so good homes in not so good locations for GREAT prices will also sell. But the price always has to be competitive.

Listen, the people who are sitting on the sidelines saying they're not buyers until prices fall 25 or 50 percent were never buyers in the first place. So I don't suggest sellers lose their collective heads here, but what I am suggesting is that the marketplace is re-pricing assets - including homes, and that falling prices are a reason for sellers (who will turn around and buy!) to get more interested in real estate, not less.

I also continue to believe that we're at a nexus of low prices and low interest rates right now. While prices may fall a little more, I don't believe interest rates will.

I think these are messages buyers and sellers need to hear. Sellers have to understand that they have to get priced right to compete, and buyers have to understand that the window for having your cake and eating it too with interest rates may be fairly narrow.

Buyers also have to understand that they incur risk by letting low financing costs pass them by.

Say buyers are looking at a median $218,900 house with 20% down and a 30-year fixed rate mortgage at 5.5.%. Their monthly payment is $994.31.

Now, let's say that house drops an additional 10-percent to $197,010. At just 6% on the note, that monthly payment comes in at (drum roll): $994.94.

Living in the apartment for another year waiting for another 10-percent to come out of the median home price would have resulted in the same monthly payment!

Americans of course only care about the monthly payments, but just because I can't leave it there, get this: Over the life of the 30-year mortgage - the buyer who saved 10-percent on the purchase price will pay an additional $32,000 in interest payments. Remember too that we're just talking about a half-percent! The numbers really go crazy when interest rates go to 7, 8, 10 percent.

How do you deal with the daily barrage of "bad" news about falling prices? Buyers need to know that homes are "on sale" and that money still is too - but it won't last forever.

Sellers need to understand that today's bad news is more evidence of the need to price competitively if they want to sell.

Comments? Post them here.

The numbers don't lie - usually

Tom Layson - Opinion

You have lived through a modern day gold rush. The housing market of about 2204-2007 was a once-in-a-lifetime boom-and-bust that we'll likely never see again, and will be paying for for years to come, in several ways.

We're now back to the boring old days where homes appreciate at about the rate of inflation, lenders actually care whether you can pay them back, and you have to scrimp and save to get yourself into a house and live in it for a while to realize that it's a home first, and an investment second. It's not a disaster - it's just how it is.

Below are some numbers from U.S. News and World Report that really give us a good look at how out-of-whack things got.

The only thing the numbers don't tell us is how long it's going to take to burn off the excess. My guess is that the trend lines in all things real estate will revert to their means and the effects of the bubble will be averaged-out in about 2015. Let me know if I was wrong in seven years.

But buyers need to understand something: Because we're going to do this the long slow way instead of the short fast way, prices are going to remain flat - not likely to fall a heckuva' lot further - almost certainly not enough further to justify passing-up today's interest rates.

Think about it: You want to buy things when they are cheap, and when financing costs are low. That's where we are today. Realtors tell me people are panicked about the idea the house they buy may fall in value by another point or two over the course of the next year. If that's you: You are not going to time a perfect bottom on both price and interest rates. Think about it.

Here you go:

Percentage of all mortgages bundled into securities, 1994: 55.8 percent; 2007: 74.2 percent

Percentage of all subprime mortgages packaged into securities, 1994: 31.6 percent; 2007: 92.8
percent

Percentage of mortgage originations that were subprime, 1994: 4.5 percent; 2006: 20.1 percent.

Increase in face value of subprime mortgages issued between 1994 and 2006: 1,700 percent

Share of mortgage originations by federally regulated savings institutions, 1987: 29.8 percent; 2006: 8 percent.

Share of mortgage originations by less -regulated mortgage brokers, 1987: 20 percent; 2006: 58 percent

Average annual rise in home-price value, 1990-1999: 3 percent; 2000-2006: 8.6 percent

U.S. homeownership rate, 1985: 63.5 percent; 2007: 68.2 percent

Ratio of the median home price to median household income, 1985: 3.2; 2006: 4.6

Household debt as a percentage of disposable income, 1985: 74.9 percent; 2006: 137 percent

Total cost of the savings and loan crisis of the 1980s, in 2007 dollars: $408 billion. Total estimated cost of the subprime crisis so far: $150 billion to $500 billion.

Note: All current figures are the latest available and may not refer to the entire calendar year. Sources: Milken Institute; U.S. Census Bureau; Federal Reserve; Wholesale Access; 2007 Mortgage Market Statistical Annual; Inside Mortgage Finance; Office of Federal Housing Enterprise Oversight; Federal Trade Commission; LoanPerformance

A little less sunshine

Opinion - Tom Layson

As published in the Puyallup Herald

Look in the dictionary beside the phrase, “Conflict of interest” and you’ll find a picture of the newspaper media critic. For years, newspapers thought they could fight back against television and radio news’ immediacy, emotion and credibility by shooting little rhetorical arrows at the medium, and the people who worked in it.

On of the great insults in the newspaper media critic’s arsenal was a weapon made in Britain: The, “Newsreader” label. This suggests electronic news people aren’t true, “Big J” journalists, but rather blow-dried ding dongs who just read. The blow-dried ding dongs always got angry about this. The news people just laughed.

Frankly though, “Newsreader” is an increasingly accurate description of what the job is. This is true for too many reasons to lay out here, but one of the most striking examples can be heard on this region’s last remaining blowtorch news radio station, KOMO 1000.

In 22-years and six markets as a news person, I never heard on air news people make direct, personalized commercial endorsements like they do on KOMO. This isn’t just stretching the envelope a little by voicing a commercial to help your pals in an undermanned production department, it’s Bill, Manda and Paul (et al.) using their names to do direct, personal pitches.

KOMO general manager Jim Clayton has been on the job seven months and tells me it’s a situation he inherited. He’s not happy about it, and he watches the types of clients his news readers pitch for, but the deals are in place and the boss at the region’s dominant locally owned media company has simply thrown up his hands. “I don’t love it, but it is what it is at this point,” he says.

Last week was Sunshine Week, when citizens and citizens employed as journalists come together to call for open records and open government. The cronyism, corruption, secrecy, obfuscation and evasion that clearly dominates our civic culture here in the Puget Sound region can only be fought if strong, independent media voices question authority and demand transparency.

Radio news is already on its deathbed in this country, but every time another news outlet cedes a little of its credibility in favor of becoming just a headline service dominated by commercial messages, our grip on freedom slips a little.

I hope the news readers at KOMO are scoring lucrative product trade-outs and fat talent fees. Being in a situation where you can bolster your brand every day on the region’s dominant news radio station and be allowed to cash-in on it represents a truly phenomenal financial opportunity. Just taking the standard voice talent fee would be a major mistake. If you’re going to go: Go big.

So as I pull the “newsreader” arrow out of the media critic’s quiver of hackneyed barbs, it’s not to take a self-interested swipe at a competitor in a vibrant marketplace as might have been the case in days gone by. Rather, I do it now to simply say how sad it is.

My thoughts today

Tom Layson - Opinion

What a couple of weeks it has been. With today's dismal consumer confidence numbers, it's easy to see where our collective mindset resides these days: In the toilette.

When it comes to the stock market, these are the times when working your program pays off. My advice is to turn off the television if you can, and simply keep plugging away making your monthly dollar-cost-averaging buys and realizing that stocks are on sale right now.

When it comes to the housing market, we're starting to see reality make its slow trip to the Pacific Northwest. The most recent Case/Shiller report shows the Seattle/Portland markets finally coming into year-over-year median price reductions - albeit very limited.

A couple of months ago, I grabbed the 30% number out of my back pocket and said that house prices need to make a move to the south by about that much to find a bottom. If that's the case, we're not there yet. For home prices to move into their long-term relationships with rents and the inflation rate, we're going to see some significant reductions from here. There's just no way around it. This will be particularly true for Pierce County.

For Realtors, I also recently talked about the wisdom of passing up a listing. A home that the owners are not going to be allowed to be priced right is just not going to move. Special waterfront, view or location properties will hang-in-there if they've been seriously updated, but for most places, the ONLY levers that can be pushed to overcome ultra-negative consumer sentiment and a serious glut of inventory are price, price and price. So look at the new high-tech analytics provided by Windermere Puyallup/Canyon Road and see if price at the most granular per-square-foot basis is where it needs to be. If it is, fine. If not, make a change. If you can't, run.

For years, we've come to believe that the old boom-and-bust economy of the Pacific Northwest was a thing of the past, but this time around - we may just be late to the party. For now though, the thing to focus on here though is interest rates. They are still hanging-in-there under six percent, but I truly believe the long-term trend for rates is up. For sellers, the low interest rate button is the one that has to be pushed right now.

For buyers, this is a chance to find a good property at a good price for a good interest rate. Yes, you may be catching a falling knife, but the place you want may not be available at the bottom - or after we start pulling up off the bottom. You really have to weigh your paper loss on your home's value versus what you'll be paying in interest monthly, and over the long haul.

It will really take a sharp pencil to weigh a home's 5, 10 or 20-percent price decline over five years against a 7.5, 8.5 or 9.5 percent interest rate and the implications on your monthly cash flow and long term debt servicing costs.

I know some of you have the time and talent to do a little present and future value calculation for us to work-up some examples. I would LOVE to see a little modeling on this topic to put some real numbers up against the questionable accuracy of my gut feelings.

Post your comments here!

Risk: You had better "get it"

Tom Layson - Opinion

What is economics? This question was asked in a meeting the other day, and my answer didn't quite ring a bell. I admit I might tend to over think things a bit, but be that as it may, if you're in this game (investing, buying, selling, brokering, whatever) - there are things you must understand to be successful.

I believe economics is society's framework of incentives. It's that simple. All actions are governed by the incentive that feed back into financial rewards. I guess you can get a glimpse of my world view here.

I've written before about the two emotions that are driven by these incentives: Fear and greed. What drives fear and greed you ask? Risk. There you have it, economics in a can.

But why do you care? Because we talk about real estate a lot here, and there are a few things about economics that the the doom-and-gloom crowd are clearly forgetting.

News today (Thursday) from the Feds. the NAR, and the local MLS and mortgage originators is all good. It shows that we're crunching along the lower reaches of what we'll someday recognize as the beginning of the bottom.

Here's the problem though. Housing market-timers are going to get burned. I'm really starting to feel that buyers who are waiting for the perfect nexus of low interest rates, the perfect property, and seller capitulation may wait themselves right out of an opportunity to buy.

Interest rates are about to explode, and will only get worse in the coming years as inflation becomes this economy's dominant story.

Listen, this blog is about truth as we see it. The, "Now is a great time to buy" speech doesn't fly here as the ready-made truth at all times. Sometimes it is NOT a great time to buy, and when that happens, we'll tell you right here.

But get this: Buyers, and commentators who enjoy talking down the market, are forgetting about the nature of risk. There are risks associated with buying, and there are risks associated with not buying. Your average journalist or bubble blogger doesn't understand this. My thesis is this: That the risks associated with NOT buying are starting to come into balance with the risks associated with buying.

Do I think there is yet more air to come out of the housing market? Yes. Do I think you'll be able to find the house you want, at the interest rate you want, in the location you want six months from now if you're seeing something pretty close today? No, I do not: And that's where the risk lies.

If you ask the average person, or writer, if risk is increasing or decreasing as housing and stock prices rise - 99% of them will say that risk is decreasing as the market "improves" or "does well." Well, they are dead wrong. Risk increases. Right now, risk is is decreasing sharply. So, as the market slowly settles to a bottom - risk continues to DEcrease! You have to get your mind around that in order to get this right.

So buyers: Consider risk, and understand it. Might you be able to wait-out another 3-5% of depreciation here in the Seattle area? Sure, hang out in the apartment as long as you want. But you're going to be STUCK there for years to come if you don't move now.

Why? Because the money centers want to be paid more for risk. The credit markets are blowing up, and inflation is going to ride herd after that settles-out, forcing a sharp move upward on interest rates. That means the few thousand bucks you're going to save on the sale price of a home is going to be FAR outweighed by your payments on a 7, 8, 9 or 10+ (?) percent interest rate.

So to summarize:

Will you time the housing market perfectly? No

Will you time the credit market perfectly? No

Will you time seller capitulation perfectly? No.

And there my friends, lies the risk you face today. Better vacuum the carpets, because you may be stuck where you're at for a while.

Opinions? Thoughts? Post them here.

Air Force disgrace

Tom Layson - Very much an opinion

We might as well go all the way.

If we're going to send 100-billion dollars to France over the next 20 years or so to build Air Force refueling tankers, why should we spend billions more owning and operating them? Or for that matter, why should we even spend the money to build them? Let the French build them, and we'll lease a few when we need them if they're available.

We could surely find pilots, crew members, planners and logistics support at a much lower cost in India, Malasia, or even China. Let them build the planes, operate them, and refuel the fighter squadrons with which we write other contracts.

Want to put a little muscle on a foreign power? Just make a phone call. Need to move some assets around the world? Just call the broker in Paris, and get it done. No retirement benefits, no injured soldiers, no housing costs or a need to make more space in the nation's honored places of rest. Let's just outsource the whole damned thing.

How can we compete? Easy. Let's sell the world sub-prime mortgages rolled-up as triple-A securities. Oh wait, we've already done that. Well, we'll think of something, and if we can't, we'll just import it.

Can you tell I'm a little hot about this one? Comments?

Profiled: Buyers and sellers

By Tom Layson - Opinion

I was at a meeting of the Tacoma-Pierce County Association of Realtors this week where the guest speaker was Governor Christine Gregoire. The Governor had the good fortune of speaking to this group about the region's great economy before Friday's shattering news about Boeing's defeat on the tanker contract. Still though, even without that cherry, the Governor is bullish in Washington State: As she should be.

Earlier in the month though, the Seattle-King County Association was looking over the National Association of Realtors’ 2007 consumer survey. The survey produced a "profile" of the typical buyer. I've included a list of the result's highlights, and then some commentary about what I think it says. I may be way off, but that has never stopped me before.

The scoop on buyers:

The median age is 38. To me that skews old. Many of the baby boom are downsizing or looking for a second home - and I have been predicting a glut of 3-5,000 square foot McMansions for a long time as the kids move out, and the pain caused by the upkeep of a trophy house outweighs the prestige. My thought has been that the young can't afford these homes, and many of the old aren't interested any more. I don't know if today's tweeners (first time move ups who are into the kids, but pre-downsizing) are up to the challenge financially. Keep reading though.

They looked a median eight weeks and saw a dozen homes. That seems about right. I always bought homes in a week because we were doing relos, but I think the fact that most moves are local means that the hopped-up-house-hunt isn't reality for most buyers.

The new home is just 13 miles from their previous residence. My old life was about moving from town-to-town, but in reality, this doesn't surprise me. I think the message though is that showing listings too far from the buyer's "comfort zone" is probably a waste of time unless life circumstances are changing. Neighborhood, town or maybe city farming is vital. Be the local expert.

One-quarter bought brand-new homes. You only have to buy one brand new home to learn that you'll never do it again.

They plan to live in their home a median of 10 years. Sounds good, but I'd like to see the real number here compared to the, "Plan." Read below.

91% used the Internet to search for homes. If you're not using the Internet to sell homes, don't worry about it. Just make sure you feed the horse and churn some butter after you read this.

68% percent said they would definitely use their agent again. That means 32-percent would not. That is a very, very high customer dis-satisfaction number. You get what you pay for, and working with reputable, career level people with solid knowledge and support is simply vital. The cut-rate, "Let's try real estate" for a while crowd can not help you do a good deal. Many of them are now back at McDonald's.

The scoop on sellers:

The median age is 45 and almost half traded up to a larger home. When we were living in New Jersey, I could NOT believe how many 50-somethings were coming out to the sticks to buy big homes. I couldn't figure out what in the heck they were doing. But then I realized they were buying the homes they always wanted. They were 15 years too late, but damn the torpedos, they were going to get the 25-hundred square foot, 1/4 acre, stone front and high entryway home they always wanted but couldn't get after growing up and raising kids in the wealth belt around New York City. I think the same thing happens in every area though - and I never cease to be amazed at the empty-nesters, or near empty-nesters who either buy or build McMansions.

Typically, they owned their home for six years. But they planned on 10 didn't they? Real estate professionals need to understand that maintaining relationships with buyers and sellers is vital - because six years later, they're at it again.

59 percent believed their home purchase was a better investment than stocks. This is part of what caused the housing bubble. They are different investments and different asset classes. This question shouldn't even be asked because in a perfect world there would be no answer. Homes are places to live that should appreciate at about the rate of inflation - period. And oh, you get to write off the interest.

Half did not reduce their sale price. They were either priced right, or completed this survey a year ago.

Half used the same agent to sell their home and purchase another. And remember, they'll do it again in six years.

64 percent said they would definitely use their agent again. Even worse than buyers. Yipes.

Any thoughts on this? Post them here.

The Next Pot of Gold

By Tom Layson - Opinion

As published in the Puyallup Herald

When asked why he robbed banks, depression area criminal Willie Sutton simply replied, “Because that’s where the money is.” Ask a simple question, get a simple answer.

Driving down Pioneer one day, I noticed one of those little signs on a telephone pole that talked about buying real estate by tapping your 401k. Then a few days later, I heard a commercial on the radio pumping a debit card drawn on 401k funds.

After doing a little research, it’s clear where the next wave of predatory lending and consumer spending is heading: Right into the retirement fund. With paychecks stagnant, credit cards maxed out and home equity already tapped, it’s all that’s left to rob. Who is the robber in this emerging drama? Is it the debt cartel? Is it the willing individual? I think the answer is, “Yes.”

I can’t think of a more corrosive idea. Hard earned and previously out-of-the-grasp retirement funds invested in assets at least designed to appreciate can now be easily leveraged and converted for use on consumer goods - typically non-assets that quickly depreciate. The old barrier of having to apply for a loan against 401k assets has been knocked-down, and so have the repayment provisions that required automatic paycheck deductions and full repayment when employment status changed.

With these new products, retirement savings devolve into the basis for yet another line of credit that nibbles away at nest eggs through fees, and the service provider’s rip on the loan.

I know this is my first column in the Herald, and that I haven’t spent the time I probably should to ease into a more comfortable topic before I start telling you what to do. But the fact is I consider the state of personal finance education to be a national emergency, and one of my passions is to try to use my tiny voice in the effort to sound the alarm about the personal finance crisis I see coming. So for the sake of this inaugural column, let’s just say it is my strong opinion that people should not tap their 401k’s to fuel consumer spending.

The thing that drives me crazy is that I already know this idea will be hugely successful and that the purveyors of this naked grab will merely portray it as giving consumers, “Options” or “Control.” Actors on TV will be telling us how a 401k loan is, “Right for me.” Sound familiar? Think about the campaign being run by the pay day lenders to keep our lawmakers in Olympia off their backs.

But wait; now that I think about it, there may be another evolution of this program: How about taking an advance against future pay and future 401k contributions? I mean heck, we’ve come this far: In for a penny, in for a pound.

Mortgage rate inflection point

By Tom Layson

I've been asked several times by people about why mortgage rates aren't still falling even though the Fed keeps cutting interest rates.

Well, the answer is that it's an apples to oranges comparision.

The Fed controls short term overnight rates that banks use to make quick loans to each other. Lower rates help grease the financial system, and also have an impact on short-term debt like credit cards and the like.

Home mortgages however are competing with long-term money like the 10-year Treasury bond which has nothing to do with the Fed. Yes, the Fed can try to manipulate the relative attractiveness of long-term investments by steepening the yield curve by cutting the short end, but that's really about it.

The dominant factor influencing long term money like mortgages is the overall economy and inflation. Investors want to be paid for risk, and with the economy declining and the Fed printing money, the inflation risk actually increases - meaning investors want more reward for locking up money in things like long term bonds or mortgages.

On top of that, the banks are struggling to take advantage of a steepening yield curve. If they can pay low rates for your deposits but charge higher rates for debt - they make more profit. With the carnage caused by the subprime debacle, the banks are looking to strenghten their balance sheets and I think are less likely to race to the bottom in a rush to compete for business.

So, there you have it. Interest rates are down right now, but frankly, with the economy approaching recession, there's a good chance mortgage rates could start moving up again even as the Fed keeps cutting the rate on short term money.

I think we're at a critical point for buyers right now. It's a sellers market that has yet to bottom, but interest rates may have.

If only we all had a crystal ball in which to gaze.

Are we there yet?

By Tom Layson

They call CNBC Bubblevision. It's a term coined by financial writer Bill Fleckenstein who rightly pegged CNBC as being one of the major media forces behind the dot-com boom and bust. There were plenty of other actors on the scene, not the least of which were The Motley Fool, TheStreet.com and Jim Cramer.

The point is that I don't put much credence in what the bubbleheads say about what's hot, and what's not. Even a broken clock is right twice a day. Don't get me wrong, Cramer is a good guy. He was a guest on my TV show a couple of years ago and there's no doubt he's incredibly bright. He's just stuck doing a TV show that has to entertain every day, feature new content every day, and get measured by his detractors every day. He loves it, and it's great TV, but it is a proven loser as investment advice no matter how vociferously he tries to hedge his bets and qualify his calls.

With that said, Cramer called a bottom on the real estate market today. But that's not what has be thinking we may be seeing this economic aircraft carrier start to turn. The fact that the downturn and the housing bust has been featured on the cover of national news magazines and on 60 minutes is an almost sure sign that we've hit a bottom - or are at least bumping-along what will form a bottom.

Are things going to get worse in California, Nevada and Florida? Oh yeah, a lot worse. Are we going to run flat here in the Pacific Northwest for a long time? Yep. But the point is this: You now really have to weigh the advantage of buying a house for a one or two percent lower price against the price of living in your current situation and taking a pass on these interest rates. In other words, there are now growing risks to standing pat. This is especially true if you have good credit and know you're going to be in your house for five years. If that's you, I would be taking a very hard look at jumping in right now.

So, I'm not going to follow Cramer. I'm not calling a bottom because I don't think it's here yet. What I do think is that the difference between where we are now and where the bottom will come is negligable enough to make pulling the trigger in this low interest rate environment a more compelling choice.

Have any thoughts on this? Post your comments here or send your email to soundoff@winpcr.com