There is usually an inverse relationship between home price and interest rates. In the late 1970’s as interest rates increased from 9 to 11%, median home price/per capita income increased from a little over 8 to 10. Over the next 2 years, as interest rates increased to over 16%, home prices decreased to a ratio of 9. During the years 1977 – 2005, there was an inverse relationship between interest rates and price/income for 18 out of 29 years (per my visual look at the chart accompanying Rich’s article).
So although low interest rates led to increasing home prices during this bubble, it does not always do so. This bubble was helped by loose lending more than anything. Once lenders eliminated the down payment requirement, anyone with a pulse could buy a house.
Although people may pay more for a house when interest rates are low, the point of the article is that this in no way makes the home more valuable. If it did, now that interest rates have gone from 5% to 7%, an increase of almost 50%, home values should have fallen a great deal. They have not. Why are people not willing to pay 50% less for that same house, now that their payments are 50% more? So much for the direct link between interest rates and home prices.
