What people do not understand about the housing market

"Interest rates are low.  Now is a good time to buy a home."

If you have considered buying a home over the past five years, you have probably heard at least one person make the above statement.  Yet, I would submit to you that interest rates being low is not a good reason to buy a home.  In fact, buying a home when interest rates are low is a risky endeavor.  The reason is as follows:

When people are looking to buy a home, they typically have in mind a monthly payment they can afford and determine how expensive a home they can afford based on that.  For example, suppose that a home-buyer can afford to pay x units of currency per unit time on housing.  If the home-buyer takes out an interest-only loan for 100% of the value of a home, then he can afford a home whose value is x/r, where r is the interest rate on the loan.  This simple computation shows us that home prices are inversely proportional to interest rates.

If you buy a home when interest rates are at historic lows, then interest rates have only one way to go: up.  When interest rates go up, the value of your home goes down.  If you then try to sell your home, you will incur a loss.

On the other hand, if you buy when interest rates are high, then when interest rates go down the value of your home will go up.  What's more, if you do not want to sell your home, you can now refinance your mortgage at a lower interest rate, thereby lowering your monthly payment.

Admittedly, the above example is an over-simplification of home price dynamics.  There are many factors that determine the direction of home prices.  But, there is no doubt that, holding all other factors constant, home prices and interest rates move in opposite directions.  And, this being the case, it is much better to buy a home when interest rates are high rather than low.