Marion, home prices are based on affordability and most of the time (other than the last 6-8 years) closely tied to fundamentals. In the last 6-8 years prices have been driven to the point of exhausting affordability even with tinkered and highly levered loan products. To make it simpler to see take the home you want to buy plug the loan amount into the amort calculator at the current interest rate and 20% down and try adding 4-5% to that. Adjust the loan amount so that you have a the same payment at the higher rate and the difference is a good idea of the hit your home value would take if rates increased.

Given the fact that the credit markets are getting so bad that banks don’t trust each other and the Gov’t is stepping in and taking on losses to help these banks (i.e. Bear Stearns) we should expect to see Treasury rates rise drastically in lack of trust. That will bring about increased mortgage rates in a bad way.