Wow! I have documented in previous posts how this low-interest-rate environment is crushing retirees and others who have accumulated savings. The Federal Reserve has just announced that they will keep interest rates at “fairy tale” levels until the end of 2014.

That means personal income from interest will not recover for another three years.

What does this mean for real estate?

First, mortgage rates will remain at fantasy levels for another three years. There is no urgency to buy a house now. You don’t have to worry about rising interest rates, so you can postpone buying for a long time. As we say in the business, buyers can now “stay on the fence” for another three years. This is not good news for people who make a living based on transaction volume of residential real estate.

Second, for older Americans there is now little hope that their savings will earn anything for another three years. Americans with savings who have retired already or are considering retiring in the next five years will have to rethink their lifestyle. Treasury bonds have no yield. Inflation-protected Treasury bonds have no yield. Money market accounts have no yield. Certificates of deposit have no yield.

The real estate implications are:

Older people who were planning to buy a second home in Texas may have to revise their plans. This will slow demand for second homes and demand for lakefront and Hill Country properties. This will also affect the demand for properties on golf courses.

People who retired in the past five years, hoping to live on a golf course and play golf are going to have less income than they thought possible. Those who don’t “play enough golf to make it worth it” will let their memberships expire and play a few rounds at the municipal course instead. Golf course developers will find fewer buyers willing to buy a second home in their project.

Other people who might have wanted a second home to be near the grandkids will have to reconsider as well. When your interest income falls 75 percent, you feel less confident about your financial ability to maintain two homes.

Lower interest rates will increase the value of quality commercial real estate properties. Cap rates are likely to compress even further than they already have. This is part of the Federal Reserve plan to reduce the losses in the banking system from bad real estate loans made in 2005—08. Watch sales prices for “trophy” commercial real estate to move back into bubble territory that we last saw in 2008.

Low interest rates will also create even more feverish demand for agricultural cropland. Prices have increased dramatically in the past two years, and buyer enthusiasm is increasing. Watch quality cropland increase even more. Watch out for bubbles in this sector as well.

Of course, this announcement is likely to cause more investor demand for gold. Gold fever is a natural result of ongoing concerns over a money-printing-happy government.

This is exactly what Japan has done. Their stock market bubble collapsed in 1989. The bubble in commercial real estate collapsed two years later. Banks had catastrophic levels of loan losses. All were deemed “too big to fail.” Unable to recognize the losses, they went into an “extend and pretend” mode for many years. Interest rates in Japan have been negligible for years, and their government goes further and further into debt each year.

Finally, low interest rates enable Congress to spend trillions of dollars that it doesn’t have. In theory, the government could spend a quadrillion dollars this year and fund it with government bonds that have virtually no interest cost. Hence, there is no cost to infinite borrowing. This move by the Fed makes it even easier for Congress to postpone for years any attempt to balance the budget.

One Fed president made this statement about a year ago when asked about the possibility that the U.S. credit rating could be downgraded: “It is no longer prudent to consider the unthinkable improbable.”

Five years ago, nobody would have guessed that their hard-earned savings would earn almost nothing. Up until yesterday, nobody would have guessed that their savings would earn nothing for another three years.

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