Real estate buyers spend a considerable amount of time and energy agonizing over home prices.  Will they go up?  Will they go down?  But those buyers are asking the wrong questions.

The real question is “Will the combination of home prices and interest rates become more or less favorable?”

If prices drop and interest rates rise, the net effect may be no gain for the home buyer.  A key component is where interest rates are headed.

Right now, interest rates are low, and perhaps artificially low.  The  government has been printing money like crazy to try and keep rates low.  How long can that go on?  I suspect that higher interest rates are in store for the future.

Without getting into the equations involving home price, down payment, loan amount, and interest rate to determine the mortgage payments, on a very high level it is obvious that when rates rise they pull mortgage payments up in the same ratio.  For example, rates rising from 6% to 7% would reflect a change of almost 17%.  If prices don’t drop, that means payments are going up 17%, obviously bad for buyers.  And even if prices drop, will they fall enough to maintain the same payment?

If rates rise faster than home prices drop, the net effect to the buyer is that it will cost more to buy a home.