What will happen with home prices?

This is an obvious questions to any potential buyer and is especially pertinent considering the last few years.  I have read an article on Zillow and then another on businessweek where the writers are concerned about another bubble starting.  Here is a link to the article – http://www.businessweek.com/articles/2013-04-10/cheap-mortgages-are-hiding-the-truth-about-home-prices#r=hpt-fs

The quick summary is they are concerned that historically low interest rates are causing homes to appear cheaper than they really are and once these rates begin to rise that it will cause demand for houses to fall and thus home prices to fall again.  This could certainly happen and as the economist says Ceteris paribus it would be true.  However, the article doesn’t account for what would cause interest rates to rise.  Typically the Fed would do this once they start to see inflation.  Houses like all other assets would be affected by this inflation.  So while I agree that rising rates would put downward pressure on nominal prices it is not as clear that rising rates to combat inflation would result in lower nominal house prices.  If inflation was a stronger force then you could still see house prices increase in this environment.  Now this would not be a “real” increase or an increase when adjusted for inflation, but an increase none the less and keep you from coming to the closing with a large check in your hand assuming you have to move in 2 years.

So what will happen with housing prices – your guess is as good as mine.  Just know that an increase in interest rates doesn’t necessarily mean that nominal house prices will fall.  Like most things it is just a lot more complicated than a quick article online is capable of addressing.

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