Most people buy homes with a mortgage, where the number they look at is "can I afford the monthly payment?" When interest rates are high, the same monthly payment gets you a much smaller mortgage, which means there's less money to buy a house, which means that house prices come down accordingly.
It ends up being pretty close to a zero-sum game: house prices go up when mortgage rates go down, and house prices go down when mortgage rates go up.
The problem with the recent financial innovation has been that it prices fiscally responsible people out of the market. So when you can get a zero-money down option ARM without proof of income, suddenly people who never could've gotten a mortgage have a lot of money to spend on houses. The price of a house rises accordingly, and soon only people who are willing to take out zero-money-down option ARMs can afford them. Fiscally prudent people who're looking for a 30-year-fixed, 20% down mortgage see that homes are overpriced, and so they sit on the sidelines and rent.
It's Gresham's Law: "Bad money drives out good". It's why we got such a housing bubble in the U.S: it wasn't that consumers were individually stupid, it's that they were responding rationally to economic incentives, and those incentives led to a market where only people who had no possible way of paying back their loans were buying houses. One of my coworkers bought a house in 2006: he said that the loan officer told them that basically all loans that they wrote were now interest-only. Small wonder, considering that everyone who was looking to put down 20% found that homes were too expensive for them to afford.
Luckily, this process works in reverse, too. Now that the bubble's bursting, the only people who can get loans are the ones able to put significant money down. Good things come to those who wait.
Most people buy homes with a mortgage, where the number they look at is "can I afford the monthly payment?" When interest rates are high, the same monthly payment gets you a much smaller mortgage, which means there's less money to buy a house, which means that house prices come down accordingly.
It ends up being pretty close to a zero-sum game: house prices go up when mortgage rates go down, and house prices go down when mortgage rates go up.
The problem with the recent financial innovation has been that it prices fiscally responsible people out of the market. So when you can get a zero-money down option ARM without proof of income, suddenly people who never could've gotten a mortgage have a lot of money to spend on houses. The price of a house rises accordingly, and soon only people who are willing to take out zero-money-down option ARMs can afford them. Fiscally prudent people who're looking for a 30-year-fixed, 20% down mortgage see that homes are overpriced, and so they sit on the sidelines and rent.
It's Gresham's Law: "Bad money drives out good". It's why we got such a housing bubble in the U.S: it wasn't that consumers were individually stupid, it's that they were responding rationally to economic incentives, and those incentives led to a market where only people who had no possible way of paying back their loans were buying houses. One of my coworkers bought a house in 2006: he said that the loan officer told them that basically all loans that they wrote were now interest-only. Small wonder, considering that everyone who was looking to put down 20% found that homes were too expensive for them to afford.
Luckily, this process works in reverse, too. Now that the bubble's bursting, the only people who can get loans are the ones able to put significant money down. Good things come to those who wait.