In a previous post I wrote about how aggressive underwriting (underwriting allowing a high percentage of income to be used for the debt, qualifying on low teaser rates and/or an interest only basis, low down payment requirements) can inflate home values. An even more basic rule is that a decline in interest rates increases values, and increases in interest rates reduce values. For example, the decline in interest rates between January, 1995 (when Freddie Mac's Primary Mortgage Markey Survey 30 Year Fixed Rate was reported at 9.15%) and January, 1999 (when the rate was 6.79%) accounts for almost all the increase in OFHEO's Housing Price Index during this period. Here's the math:
Of course, there are factors other than interest rates which also affect values (to be addressed in other posts). For now, my point is when other factors are in balance declining interest rates increase values, and rising interest rates decrease values.
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