Yesterday the Fed made 2 decisions that fundamentally affect the real estate industry. First, they kept the federal funds rate (what banks charge each other for overnight loans) unchanged. Secondly, and more directly, they decided to extend their purchase of mortgage backed securities, which has kept interest rates low. How do these decisions made so far away affect Joe and Mary Mainstreet thinking about buying a home? Interest rates are at historic lows, but only because the Fed says so.

Most lay people are clueless where “money comes from”. For most home purchases, it doesn’t come from B of A, Wells Fargo, Citi, etc. These lenders are merely conduits of money.

Lenders make lots of loans to people like you and me, then turn around and sell them back in bundles to the “secondary” market like the Federal National Mortgage Association (Fannie Mae), Freddie Mac and Ginnie Mae (Government National Mortgage Assc – for FHA and VA loans). The money the lender gets for selling your loan gets put back in their pot so they can make another loan. The money goes round and round.

But where do the secondary market people get their money?

Normally, that money came from investors in the form of pension money, your 401k plan and other large pools of money looking for safe, stable income. But that dried up in the credit crisis.

So lately, that money has been coming from you and me – as in taxpayers, and now we come to the Fed. We’re talking very big money now. $1.25 TRILLION clams. To keep the housing industry afloat in the credit crunch when no bank was willing to loan money, the Fed stepped in to buy up the mortgage backed securities from these institutions, which in turn has:

• Kept the money flowing
• Kept interest rates at historic lows to entice home purchases

The significance of yesterday’s decision was that the Fed previously had said they’d spend “up to” $1.25 trillion and end the program this year, but now they stated they’d spend the full amount and extend the program through March of next year.

Prior to this decision, it was felt interest rates would start back up as the Fed wound down its purchases and (hopefully) the traditional sources of funding would kick in again, but the economy is still fragile and this breathing room was given to stabilize our economy.

In summary, if you’re on the fence thinking about buying, especially if you qualify for the $8,000 first time home buyer credit, you probably won’t ever find interest rates this low for a long time.