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Are housing prices and interest rates related?  I am getting conflicting answers: 

Here is a quote from Shiller's book, Irrational Exuberance, "Obviously, there is no hope of explaining home prices in the United States solely in terms of building costs, population, or interest rates." 

Here is one reason Patrick offers why it is a terrible time to buy: "Because it's a terrible time to buy when interest rates are low, like now. Realtors just lie without shame about this fundamental fact. House prices fall as interest rates rise, because a fixed monthly payment covers a smaller mortgage at a higher interest rate." 

Using Shiller's data set from 1890 until the end of 2007, I calculate the correlation of house prices and long term interest rates to be 0.20, which does not seem too strong.  Even if the correlation were strong, this would tell us nothing about the direction of causation (i.e. do high house prices cause high interest rates or do high interest rates cause high house prices?).  Note the correlation is not negative as Patrick suggests.     

Can anyone accurately predict interest rates?  I think you can make a fortune in the bond market if you can forecast interest rates.  Maybe those of us who have not made money speculating in the bond market should ignore the current level and forecasts of interest rates when considering real estate investments.

#housing