Prudential's Silitch today said that with bond yields so low a loss of investor interest could be a real possibility. More importantly he noted something I've believed for a while now and that i first heard from Peter Schiff; if interest rates are for any reason forced upward, whether in an effort to curb inflation or something else, the prices of real estate could take a major hit.
You see the fair market value on a piece of property consists of two major parts, the actual property value and then the amount of the interest on the loan. So say that the average single family home is worth $250,000; that is what people are willing to pay for that piece of property. That number is the total loan amount which is the price of the home plus the interest. Now if interest rates suddenly climbed from near zero to 5% or 10% the price that someone is willing to pay for that house will not necessarily change. Which means that the interest portion of the loan has increased so the value of the home must theoretically decrease to compensate.
Total Loan Amount = Interest + Home Price
Another thing to note is that even if property does begin to rise in price, it may be falling in value.
Price is a unit of measure using the US Dollar, while Value is measured against other assets.
The price may rise simply because they are printing so much currency, but when you measure the gains against those of gold or cotton or oil, etc you will find the actual value of the asset.
