Zero Percent Fed Funds Rate? You've Got To Be Kidding! What's Next?

There is no doubt that we are living in very interesting times. Earlier this week the Federal Reserve lowered the Fed Funds rate to zero, which means they are basically giving money away. Good grief! And that's not the end of it. The Fed also said they will buy up every crappy financial asset anyone wants to sell them. I guess they are also the financial junkyard of last resort as well.

What this means is that our government is doing everything possible to encourage Americans to run up even more debt than we have now. Is there anyone out there who can explain to me why this is a good idea? It seems that a major reason why we are in the economic mess we find ourselves in is a result of our borrowing from tomorrow to spend on today. How can even more borrowing solve the problem that too much borrowing caused? What am I missing? If you find yourself in a hole, isn't it better to put down the shovel and have someone get you a ladder, instead of getting a bigger shovel?

I know that our "leaders" are hoping this will stimulate economic activity, but why do I have a nagging feeling we will not get the result they are hoping for, but end up with someone much worse than recession, like massive inflation? I don't pretend to be a genius on economic matters, but I have a hard time figuring out how the bad habits that created a problem can be solved by more of the same bad habits. Will someone please explain it to me?

As a real estate broker I do see some upside to this in the short run. Interest rates on mortgages have come down and are around 5% and the rates on home equity loans are ridiculously low. There are already stories that the applications for refinances have gone through the roof. The downside of this is that the people who are in a position to refinance are, for the most part, the people who don't have their homes. Those people who have their homes for sale because they are upside down with their equity or are behind on their current mortgages can't refinance, so the lower rates will do them no good.

The government has been trying to figure out a way to support the real estate market to prevent further declines in real estate prices. So far, their efforts have failed. I suspect this latest move will fail also. No doubt that some buyers will come into the market to take advantage of the lower interest rates, but probably not enough to have an impact.

My experience over the years has taught me that people come into the market and buy houses when they feel secure and are optimistic about the future. There isn't a lot of that out there right now. If someone thinks they may lose their job, or if they are concerned about their future, they don't buy houses, even if the interest rates are very low.

And so the beat goes on. What can we likely expect over the next few months? The number of sales will likely be too low to firm up the prices, which means we will likely see prices continue to fall and with that will come a new crop of homeowners who will find themselves upside down with their equity.

Merry Christmas.