Home Price to Income Ratio
A more relevant metric to consider - monthly mortgage payment to monthly income ratio.<p>Average interest rates in 2007 were 6.34% vs ~2.80% today. [1]<p>* 6.34% &#x2F; $2,000 monthly payment &#x2F; 20% down (~$65k) &gt;&gt; $328,319 price of home<p>* 2.80% &#x2F; $2,000 monthly payment &#x2F; 20% down (~$98k) &gt;&gt; $489,794 price of home<p>Homebuyers will make purchasing decision based on their monthly mortgage payments, instead of the home price.<p>When interest rates fall, the home&#x27;s price goes up but the monthly payment can stay the same. Therefore, increases in home (and other asset, since lower bowering costs can drive institutional investment in assets higher and non-linearly) prices can be driven higher without any change in supply &#x2F; demand dynamics.<p>Some hypotheticals to consider:<p>* as rates approach and touch 0, what will drive up home prices then?<p>* what happens when rates go up?<p>[1] <a href="http:&#x2F;&#x2F;www.freddiemac.com&#x2F;pmms&#x2F;pmms30.html" rel="nofollow">http:&#x2F;&#x2F;www.freddiemac.com&#x2F;pmms&#x2F;pmms30.html</a>