Higher pending sales forecast busier season in local market
Pending sales remained above the 500 level once again in October, forecasting a stronger market for the winter real estate season in the Sarasota area. Pending sales reflect contracts executed by buyers and sellers, and current numbers indicate more closings likely in the upcoming months - a positive sign. In October 2008, 549 properties were reported pending, compared to only 446 in the same month last year.
Single family unit sales were also higher in October 2008 than in October 2007, while only a little lower than September 2008. There were 306 single family homes sold in October this year, compared to only 264 in October 2007, an increase of 16 percent. Condominium sales were weaker in October 2008, with 63 sales reported, compared to 120 in October 2007.
Another important market tracker - the absorption rate of properties on the market - is lower than last year at this time and has been steadily declining with decreasing inventories since May. Absorption rate is the number of months it would take to sell the entire remaining listed inventory in a particular category, based upon the sales for that particular month. For October 2008, the absorption rate for single family homes stood at 18.2 months, compared to 18.3 months in September 2008, and 31.7 months in October 2007. For condominiums, the absorption rate was 28.7 months in October 2008, compared to 33.5 months in September 2008, and 45.1 months in October 2007.
The single-family median sales price for the 12-month period ending October 2008 was $257,000. This compares to $310,000 for the same 12-month period ending October 2007. For condominiums, the 12-month rolling median sale price was $320,000 at the end of October 2008, and $357,000 for the 12 months ending October 2007, down about 10 percent.
"The strong pending sales in our market indicate that we should expect the winter season to remain stable and stronger than the late summer and early fall," said Helen Sosso, 2008 SAR President. "We are obviously living in historic times, particularly in respect to our national economy. But people continue to look at real estate as a safer place for their investment dollars in relation to other common investments. The stock market has obviously tumbled, and other commodities, like oil, have seen their values cut in half in only a few short months. Real estate has weathered the storm much better, and there are incredible values in our market right now. Families seeking a home as a future investment and a great place to live are still looking at Sarasota."
The current local market continues to demonstrate statistically that we have a great selection of more affordably priced housing for buyers to purchase. In addition, declining inventory levels normally indicate the market is returning to a more historical balance, which eventually leads to normal, long-term price appreciation.
Tuesday, November 25, 2008
Tuesday, November 18, 2008
Sarasota High School no longer a school!
Keys to Sarasota High School were ceremoniously handed over to the Ringling College of Art and Design Monday morning, when officials from the college also showed off plans to house the Sarasota Museum of Art in the historic structure.
Museum president Wendy Surkis said the museum would strongly honor the history of the school, which opened in 1927. That will involve maintaining the roadside exterior and many of the original tile mosaics in the school floor.
“We have nicely married the old and the new,” Surkis said.
The back of the facility will be heavily renovated, with the addition of an auditorium, gift shop, sculpture garden and large installation galleries. The additions are being built with prominent windows.
The second floor of the building will be dominated by the museum, while the first and third floors will have classrooms, including some that will be used for art classes and can be viewed from museum windows as students make art.
Museum president Wendy Surkis said the museum would strongly honor the history of the school, which opened in 1927. That will involve maintaining the roadside exterior and many of the original tile mosaics in the school floor.
“We have nicely married the old and the new,” Surkis said.
The back of the facility will be heavily renovated, with the addition of an auditorium, gift shop, sculpture garden and large installation galleries. The additions are being built with prominent windows.
The second floor of the building will be dominated by the museum, while the first and third floors will have classrooms, including some that will be used for art classes and can be viewed from museum windows as students make art.
Monday, November 3, 2008
Is now the time to donate your Home?
Plunging real-estate values have made it an opportune time for older homeowners to give property to their children, while realizing big savings on gift and estate taxes.
They can do this by moving the home out of their estate with a so-called qualified personal residence trust, or QPRT, which allows homeowners to live in a property for many years before passing it on to their heirs. Though the trusts have been around for many years, many estate planners say now could be a good time to set one up since real-estate values have fallen dramatically in many markets.
QPRTs are one of a number of strategies that wealth advisers and estate planners are recommending as clients cope with beaten-down financial markets and a nasty real-estate landscape. The goal: Put beaten-down assets into trusts now and reap benefits from their appreciation outside of your estate. With real-estate values low, executing a QPRT now ensures your estate won’t contain a more-expensive home down the road, which could trigger a costly tax bill for your estate.
Most estate planners say activity on QPRTs remains quiet these days amid uncertainty over the direction of the estate tax and investors’ timidity in parting with assets during a bear market. But these same wealth advisers say conditions could be ripe – now and in the months ahead – for executing these trusts.
By transferring your home into a QPRT (often pronounced CUE-pert) when the value of your home is most likely at a low point, you’re effectively locking in a lower gift-tax amount when you move the home into the trust. And if interest rates move higher in the months ahead, that discount could be even greater because of the special method the Internal Revenue Service uses to compute the home’s gift-tax value.
“We’re probably heading to a time where it might be a perfect storm” of market conditions that make it the time to set up a QPRT, says Janine Racanelli, head of the Advice Lab at J.P. Morgan Chase & Co.
Henry “Terry” Christensen III, a lawyer at McDermott Will & Emery LLP, says his firm executed about 50 percent more QPRTs earlier this year than it did two years ago. Mr. Christensen says that the trusts are especially popular in California and Florida, where home prices have dropped the most.
Here’s how a QPRT works: Say you’re 60 years old and own a $1 million home. You’d like to leave the home to your children, but worry the property could jack up the value of your estate, perhaps pushing it high enough to trigger the estate tax. (The basic federal estate-tax exemption is $2 million per person for 2008, with the top estate-tax rate at 45 percent.)
To move the asset out of your estate, you can put the home into a QPRT for a term of 10 years (terms can be longer or shorter, depending on your situation). For those 10 years, your living arrangements don’t change – you live in the home and pay all the expenses, including property taxes.
Because you’ve given the home to a QPRT, you’ll have to file a gift-tax return that year, but you stand to benefit from a complex IRS formula that actually discounts your gift amount when you move the home into the trust. Assuming that value doesn’t push you over your $1 million lifetime gift-tax exemption, you won’t have to pay taxes at all.
The formula, among other things, considers your age, the IRS’s current applicable federal rate of 3.8 percent, which is the federal interest rate used to set up trusts or loans to relatives, and the 10-year length of the trust. Assuming your home appreciates 4 percent a year, the formula can nearly halve the value of your house for gift-tax purposes.
After 10 years, the home transfers to your beneficiaries, usually your children. At this point, they own the home, and it’s outside your estate and won’t be subjected to estate taxes. In this example, when the QPRT expires, your home is worth nearly $1.5 million. Assuming you live well into your 70s or 80s, it’s likely to be worth even more.
If you wish to remain in the home, you’ll have to pay fair-market rent to your kids, or risk running afoul of the IRS, which could scrutinize your children for allowing rent-free use of the property. When you die, your children keep the house and don’t have to pay inheritance taxes.
In 1986, Tom and Margie Williams of Columbus, Ohio, bought a lakeside cottage on Walloon Lake in Petoskey, Mich., near the northern tip of the state. Over the years, the couple and their three daughters spent summers there and used the spot for Christmas reunions. The home also had some historical value: Built in 1875, it stands in a lakeside community where Ernest Hemingway spent time as a child.
As the Williamses entered their 60s, they sought estate-planning advice, determined to keep a property near and dear to them in the family without burdening their children with a bigger estate-tax bill.
In 1996, the couple turned the $300,000 home over to a QPRT for a 10-year term. At the time, the applicable federal rate was 7.6 percent. The value of the cottage for gift-tax purposes was only about $120,000. The couple were nowhere near exceeding their lifetime $1 million gift-tax exemption, so they didn’t have to pay taxes on the transfer.
In 2006, the home passed to their children, who now collect rent from the couple in exchange for their right to use the home. “I always tell Margie, ‘Check with the landlord,’“ when something goes wrong, says the 73-year-old Mr. Williams.
The Williamses passed more money to their daughters through other maneuvers in the hope that they’ll maintain the home for years to come. “They’ve kept it this long,” says Margie Williams, “and they won’t have to pay the inheritance taxes.”
These trusts have some quirks. If you die before the trust term expires, the home reverts to your estate, nullifying any potential estate-tax savings. Because of this rule, it’s essential to take stock of your age and health when drawing up the trust.
Also remember that a QPRT is an irrevocable trust, meaning you have to give up the home when the term ends. That type of planning can be tricky - it’s sometimes hard to predict what your relationship with your children will be one or two decades down the line, and there’s no guarantee your beneficiaries will let you stay in the house.
Of course, a QPRT makes sense only if you anticipate your assets will exceed the estate-tax exemption when you die. In 2009, that exemption jumps to $3.5 million.
The tax is set to vanish in 2010, and then return in 2011 with a lower $1 million exemption and a 55 percent top rate. But most estate planners are betting Congress will revise the current structure. Both presidential candidates want to keep the estate tax, though with different exemptions and tax rates.
In addition to uncertainty surrounding the estate tax, some estate planners discourage QPRTs at times like these, when interest rates, including the applicable federal rate, are low. That’s because you get a greater discount on your gift-tax value when the rate is higher. But other advisers tell clients not to focus too much on the rate, especially if your home’s value has declined significantly in the past year or two.
“I think the idea that they’re only attractive when interest rates are high is just a myth,” says Natalie Choate, a Boston estate-planning lawyer and author of a widely used book on QPRTs. “If you wait until interest rates are high, it may be too late because of your health or because the house has appreciated dramatically.”
They can do this by moving the home out of their estate with a so-called qualified personal residence trust, or QPRT, which allows homeowners to live in a property for many years before passing it on to their heirs. Though the trusts have been around for many years, many estate planners say now could be a good time to set one up since real-estate values have fallen dramatically in many markets.
QPRTs are one of a number of strategies that wealth advisers and estate planners are recommending as clients cope with beaten-down financial markets and a nasty real-estate landscape. The goal: Put beaten-down assets into trusts now and reap benefits from their appreciation outside of your estate. With real-estate values low, executing a QPRT now ensures your estate won’t contain a more-expensive home down the road, which could trigger a costly tax bill for your estate.
Most estate planners say activity on QPRTs remains quiet these days amid uncertainty over the direction of the estate tax and investors’ timidity in parting with assets during a bear market. But these same wealth advisers say conditions could be ripe – now and in the months ahead – for executing these trusts.
By transferring your home into a QPRT (often pronounced CUE-pert) when the value of your home is most likely at a low point, you’re effectively locking in a lower gift-tax amount when you move the home into the trust. And if interest rates move higher in the months ahead, that discount could be even greater because of the special method the Internal Revenue Service uses to compute the home’s gift-tax value.
“We’re probably heading to a time where it might be a perfect storm” of market conditions that make it the time to set up a QPRT, says Janine Racanelli, head of the Advice Lab at J.P. Morgan Chase & Co.
Henry “Terry” Christensen III, a lawyer at McDermott Will & Emery LLP, says his firm executed about 50 percent more QPRTs earlier this year than it did two years ago. Mr. Christensen says that the trusts are especially popular in California and Florida, where home prices have dropped the most.
Here’s how a QPRT works: Say you’re 60 years old and own a $1 million home. You’d like to leave the home to your children, but worry the property could jack up the value of your estate, perhaps pushing it high enough to trigger the estate tax. (The basic federal estate-tax exemption is $2 million per person for 2008, with the top estate-tax rate at 45 percent.)
To move the asset out of your estate, you can put the home into a QPRT for a term of 10 years (terms can be longer or shorter, depending on your situation). For those 10 years, your living arrangements don’t change – you live in the home and pay all the expenses, including property taxes.
Because you’ve given the home to a QPRT, you’ll have to file a gift-tax return that year, but you stand to benefit from a complex IRS formula that actually discounts your gift amount when you move the home into the trust. Assuming that value doesn’t push you over your $1 million lifetime gift-tax exemption, you won’t have to pay taxes at all.
The formula, among other things, considers your age, the IRS’s current applicable federal rate of 3.8 percent, which is the federal interest rate used to set up trusts or loans to relatives, and the 10-year length of the trust. Assuming your home appreciates 4 percent a year, the formula can nearly halve the value of your house for gift-tax purposes.
After 10 years, the home transfers to your beneficiaries, usually your children. At this point, they own the home, and it’s outside your estate and won’t be subjected to estate taxes. In this example, when the QPRT expires, your home is worth nearly $1.5 million. Assuming you live well into your 70s or 80s, it’s likely to be worth even more.
If you wish to remain in the home, you’ll have to pay fair-market rent to your kids, or risk running afoul of the IRS, which could scrutinize your children for allowing rent-free use of the property. When you die, your children keep the house and don’t have to pay inheritance taxes.
In 1986, Tom and Margie Williams of Columbus, Ohio, bought a lakeside cottage on Walloon Lake in Petoskey, Mich., near the northern tip of the state. Over the years, the couple and their three daughters spent summers there and used the spot for Christmas reunions. The home also had some historical value: Built in 1875, it stands in a lakeside community where Ernest Hemingway spent time as a child.
As the Williamses entered their 60s, they sought estate-planning advice, determined to keep a property near and dear to them in the family without burdening their children with a bigger estate-tax bill.
In 1996, the couple turned the $300,000 home over to a QPRT for a 10-year term. At the time, the applicable federal rate was 7.6 percent. The value of the cottage for gift-tax purposes was only about $120,000. The couple were nowhere near exceeding their lifetime $1 million gift-tax exemption, so they didn’t have to pay taxes on the transfer.
In 2006, the home passed to their children, who now collect rent from the couple in exchange for their right to use the home. “I always tell Margie, ‘Check with the landlord,’“ when something goes wrong, says the 73-year-old Mr. Williams.
The Williamses passed more money to their daughters through other maneuvers in the hope that they’ll maintain the home for years to come. “They’ve kept it this long,” says Margie Williams, “and they won’t have to pay the inheritance taxes.”
These trusts have some quirks. If you die before the trust term expires, the home reverts to your estate, nullifying any potential estate-tax savings. Because of this rule, it’s essential to take stock of your age and health when drawing up the trust.
Also remember that a QPRT is an irrevocable trust, meaning you have to give up the home when the term ends. That type of planning can be tricky - it’s sometimes hard to predict what your relationship with your children will be one or two decades down the line, and there’s no guarantee your beneficiaries will let you stay in the house.
Of course, a QPRT makes sense only if you anticipate your assets will exceed the estate-tax exemption when you die. In 2009, that exemption jumps to $3.5 million.
The tax is set to vanish in 2010, and then return in 2011 with a lower $1 million exemption and a 55 percent top rate. But most estate planners are betting Congress will revise the current structure. Both presidential candidates want to keep the estate tax, though with different exemptions and tax rates.
In addition to uncertainty surrounding the estate tax, some estate planners discourage QPRTs at times like these, when interest rates, including the applicable federal rate, are low. That’s because you get a greater discount on your gift-tax value when the rate is higher. But other advisers tell clients not to focus too much on the rate, especially if your home’s value has declined significantly in the past year or two.
“I think the idea that they’re only attractive when interest rates are high is just a myth,” says Natalie Choate, a Boston estate-planning lawyer and author of a widely used book on QPRTs. “If you wait until interest rates are high, it may be too late because of your health or because the house has appreciated dramatically.”
Will Interest rates drop to zero?
Just how far will the Federal Reserve go in lowering interest rates to save the country from a long and painful recession?
Ratcheting its key rate from the current 1 percent all the way down to zero can’t be ruled out. But there are risks in taking such an unprecedented step: namely, that it wouldn’t work in turning around the economy and breaking through a stubborn credit clog.
Eventually, a zero percent rate – virtually “free” loans for banks – could trigger a speculative investment frenzy that could feed a bubble that pops, wreaking havoc on the economy. Former Fed Chairman Alan Greenspan – now partly blamed for the current problems – has called today’s crisis a “once-in-a-century credit tsunami.”
Emphatic as it was, the bold rate reduction the Fed ordered Wednesday and the possibility of even lower rates ahead are no panacea. Even lower rates won’t necessarily entice skittish Americans to spend and squeezed banks to lend more freely – forces at the heart of the economic woes.
With any luck, though, the Fed’s action will cushion the blow to the country, which is on the brink of – or already in – its first recession since 2001.
The Fed slashed its key rate by half a percentage point to 1 percent, a rate not seen since 2003 and part of 2004. The rate hasn’t been lower since 1958.
In a gloomier assessment of the economy, Fed policymakers said “the pace of economic activity appears to have slowed markedly” as consumers and businesses cut back on spending, and economic slowdowns in other countries sap demand for U.S. exports, which have helped keep the economy afloat.
Moreover, the “intensification of financial market turmoil” is likely to weigh on consumers and businesses, further reducing their ability to borrow money, the Fed said.
Underscoring the Fed’s sense of urgency is this fact: It took just 13 months for Fed Chairman Ben Bernanke, a student of the Great Depression, to ratchet down rates to the 1 percent mark. It took his predecessor, Greenspan, 2 1/2 years.
Many economists predict Fed policymakers will drop the rate again to half a percentage point, which would mark an all-time low, on or before Dec. 16 – its last scheduled meeting of the year. The Fed left the door wide open to more rate cuts, pledging to “act as needed” to revive the economy.
“We are in a crisis situation and everything is on the table,” said Richard Yamarone, an economist at Argus Research. “If conditions deteriorate considerably, the Fed could go down to zero. It is absolutely a possibility, but I don’t believe it is likely.”
Yet even if the Fed were to lower its key rate to zero, that might not reverse the bunker mentality of consumers and lead them to ramp up spending.
More than in recent recessions, consumers have retrenched as vanishing jobs, shrinking paychecks and nest eggs, and sinking home values have made them feel less wealthy and less inclined to spend. Consumer spending – the single biggest chunk of overall economic activity – probably fell in the July-to-September quarter. That would mark the first quarterly drop since late 1991, when the country was emerging from a recession.
And just because borrowing costs are cheaper doesn’t mean banks will feel more inclined to increase lending to people and businesses.
“The problem is not the interest rate,” said Sean Snaith, an economics professor at the University of Central Florida. “It is that no one is willing to loan, regardless of what the rate is. Lower rates will not make the problem go away. The credit crunch will take time to resolve. This is another action to just chip away at the gridlock in this economy, but we shouldn’t expect a miraculous turn of events from this.”
The Fed’s move Wednesday meant the prime lending rate used to peg rates on home equity loans, certain credit cards and other consumer loans dropped to 4 percent. Even if the Fed were to cut its main rate to zero, the prime rate would fall to 3 percent but no lower.
The Fed’s previous rate reductions, in fact, were blunted by the credit crunch. The Fed slashed rates by a whopping 3.25 percentage points, from 5.25 percent to 2 percent, between September 2007 and April 2008, one of the most aggressive campaigns in decades. On Oct. 8, the Fed lowered rates again to 1.5 percent in a coordinated action with other central banks around the world.
The Fed probably would want to stop short of zero, so it saves precious ammunition – meaning additional rate cuts – should the economy take a turn for the worse later on, some economists said.
Others believe the Fed would want to avoid the fate of Japan, which failed to revive its economy even after its central bank slashed rates to zero in 1999 and kept them there for six years before bumping them up again. Japan became mired in a decade of lost growth in the 1990s after real-estate prices collapsed. That caused a severe bout of deflation, which is a destabilizing drop in prices.
“Cutting rates to zero is a fairly desperate measure, and a lot of stigma is attached to it,” Snaith said. “It would bring on comparisons to Japan.”
There’s also the worry that dropping rates to all-time lows would feed the type of speculative boom and painful bust that the country is now suffering through. Greenspan lowered rates to 1 percent in summer 2003 as he sought to aid the economy’s slow recovery from the 2001 recession and fend off a remote – but dangerous – risk of deflation. He kept rates at that historically low level for a year.
Critics contend that those low rates fed the housing bubble and lax lending standards that eventually burst and imperiled the economy. The meltdown drove up foreclosures and forced financial companies to rack up huge losses on soured mortgage investments, laying low storied Wall Street firms and causing banks to fail.
Instead of dropping rates to zero, the Fed probably will turn to other weapons to battle the crisis.
The Fed has already created first-of-its-kind programs, such as getting cash directly to companies by buying up mounds of “commercial paper,” the short-term debt firms use to pay everyday expenses such as payroll and supplies. That program, which started Monday, is helping to relieve credit stresses, economists said. The Fed also is providing loans to banks, has moved to provide a financial backstop to the mutual fund industry and has injected billions of dollars in financial markets here and abroad.
The Fed could opt to expand programs by enlarging loans it’s now making, providing loans to other types of companies, or buying more and different types of debt. The Fed’s balance sheet has doubled to $1.8 trillion in recent months, reflecting those other activities to get credit flowing again.
Because the Fed has wide latitude in these areas, many economists believe Fed policymakers are more likely to continue this route than to lower its key rate to zero.
No matter the relief tactics, though, the economy is due for more pain. The unemployment rate, now 6.1 percent, could hit 8 percent or higher by next year. Home prices are likely to keep sinking for some time, and nest eggs will continue to be battered.
“We’ve been in pain, and it will get much more severe over the next six months,” predicted Mark Zandi, chief economist at Moody’s Economy.com. “The economic damage of the financial panic has already been done, and the Fed is trying to limit the damage as best it can.”
Ratcheting its key rate from the current 1 percent all the way down to zero can’t be ruled out. But there are risks in taking such an unprecedented step: namely, that it wouldn’t work in turning around the economy and breaking through a stubborn credit clog.
Eventually, a zero percent rate – virtually “free” loans for banks – could trigger a speculative investment frenzy that could feed a bubble that pops, wreaking havoc on the economy. Former Fed Chairman Alan Greenspan – now partly blamed for the current problems – has called today’s crisis a “once-in-a-century credit tsunami.”
Emphatic as it was, the bold rate reduction the Fed ordered Wednesday and the possibility of even lower rates ahead are no panacea. Even lower rates won’t necessarily entice skittish Americans to spend and squeezed banks to lend more freely – forces at the heart of the economic woes.
With any luck, though, the Fed’s action will cushion the blow to the country, which is on the brink of – or already in – its first recession since 2001.
The Fed slashed its key rate by half a percentage point to 1 percent, a rate not seen since 2003 and part of 2004. The rate hasn’t been lower since 1958.
In a gloomier assessment of the economy, Fed policymakers said “the pace of economic activity appears to have slowed markedly” as consumers and businesses cut back on spending, and economic slowdowns in other countries sap demand for U.S. exports, which have helped keep the economy afloat.
Moreover, the “intensification of financial market turmoil” is likely to weigh on consumers and businesses, further reducing their ability to borrow money, the Fed said.
Underscoring the Fed’s sense of urgency is this fact: It took just 13 months for Fed Chairman Ben Bernanke, a student of the Great Depression, to ratchet down rates to the 1 percent mark. It took his predecessor, Greenspan, 2 1/2 years.
Many economists predict Fed policymakers will drop the rate again to half a percentage point, which would mark an all-time low, on or before Dec. 16 – its last scheduled meeting of the year. The Fed left the door wide open to more rate cuts, pledging to “act as needed” to revive the economy.
“We are in a crisis situation and everything is on the table,” said Richard Yamarone, an economist at Argus Research. “If conditions deteriorate considerably, the Fed could go down to zero. It is absolutely a possibility, but I don’t believe it is likely.”
Yet even if the Fed were to lower its key rate to zero, that might not reverse the bunker mentality of consumers and lead them to ramp up spending.
More than in recent recessions, consumers have retrenched as vanishing jobs, shrinking paychecks and nest eggs, and sinking home values have made them feel less wealthy and less inclined to spend. Consumer spending – the single biggest chunk of overall economic activity – probably fell in the July-to-September quarter. That would mark the first quarterly drop since late 1991, when the country was emerging from a recession.
And just because borrowing costs are cheaper doesn’t mean banks will feel more inclined to increase lending to people and businesses.
“The problem is not the interest rate,” said Sean Snaith, an economics professor at the University of Central Florida. “It is that no one is willing to loan, regardless of what the rate is. Lower rates will not make the problem go away. The credit crunch will take time to resolve. This is another action to just chip away at the gridlock in this economy, but we shouldn’t expect a miraculous turn of events from this.”
The Fed’s move Wednesday meant the prime lending rate used to peg rates on home equity loans, certain credit cards and other consumer loans dropped to 4 percent. Even if the Fed were to cut its main rate to zero, the prime rate would fall to 3 percent but no lower.
The Fed’s previous rate reductions, in fact, were blunted by the credit crunch. The Fed slashed rates by a whopping 3.25 percentage points, from 5.25 percent to 2 percent, between September 2007 and April 2008, one of the most aggressive campaigns in decades. On Oct. 8, the Fed lowered rates again to 1.5 percent in a coordinated action with other central banks around the world.
The Fed probably would want to stop short of zero, so it saves precious ammunition – meaning additional rate cuts – should the economy take a turn for the worse later on, some economists said.
Others believe the Fed would want to avoid the fate of Japan, which failed to revive its economy even after its central bank slashed rates to zero in 1999 and kept them there for six years before bumping them up again. Japan became mired in a decade of lost growth in the 1990s after real-estate prices collapsed. That caused a severe bout of deflation, which is a destabilizing drop in prices.
“Cutting rates to zero is a fairly desperate measure, and a lot of stigma is attached to it,” Snaith said. “It would bring on comparisons to Japan.”
There’s also the worry that dropping rates to all-time lows would feed the type of speculative boom and painful bust that the country is now suffering through. Greenspan lowered rates to 1 percent in summer 2003 as he sought to aid the economy’s slow recovery from the 2001 recession and fend off a remote – but dangerous – risk of deflation. He kept rates at that historically low level for a year.
Critics contend that those low rates fed the housing bubble and lax lending standards that eventually burst and imperiled the economy. The meltdown drove up foreclosures and forced financial companies to rack up huge losses on soured mortgage investments, laying low storied Wall Street firms and causing banks to fail.
Instead of dropping rates to zero, the Fed probably will turn to other weapons to battle the crisis.
The Fed has already created first-of-its-kind programs, such as getting cash directly to companies by buying up mounds of “commercial paper,” the short-term debt firms use to pay everyday expenses such as payroll and supplies. That program, which started Monday, is helping to relieve credit stresses, economists said. The Fed also is providing loans to banks, has moved to provide a financial backstop to the mutual fund industry and has injected billions of dollars in financial markets here and abroad.
The Fed could opt to expand programs by enlarging loans it’s now making, providing loans to other types of companies, or buying more and different types of debt. The Fed’s balance sheet has doubled to $1.8 trillion in recent months, reflecting those other activities to get credit flowing again.
Because the Fed has wide latitude in these areas, many economists believe Fed policymakers are more likely to continue this route than to lower its key rate to zero.
No matter the relief tactics, though, the economy is due for more pain. The unemployment rate, now 6.1 percent, could hit 8 percent or higher by next year. Home prices are likely to keep sinking for some time, and nest eggs will continue to be battered.
“We’ve been in pain, and it will get much more severe over the next six months,” predicted Mark Zandi, chief economist at Moody’s Economy.com. “The economic damage of the financial panic has already been done, and the Fed is trying to limit the damage as best it can.”
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