Most people do not buy a house--in reality they buy a payment. Buying the house comes later, because they begin with no equity, and most of their monthly payment for a long, long time goes not to create equity, but just to pay the interest on their loan. Let's say you borrow $200,000 and your payment is $954 at 4% interest. As most people tend to max out what they can borrow and get a bigger house if they can, the payment amount that they can afford will not change. So if interest rates go up to 6%, then this payment would be $1199. That is out of the budget restraints for the potential new home owner. A $160,000 loan at 6% will be $959. (For a handy amortization calculator, click here. All figures are from this calculator.)

Think about what this means. When, not if, interest rates go up, house prices will have to go down. Under this scenario they will decline 20% making a huge number of home "owners" owing more on their home than it is worth. (Remember that it will be years, many years, before a home owner has much equity.) The market would have already been affected by the modest increase for the last 6 months except that investors are buying 50% of all homes and they are paying "cash." A lot of these investors are using very low interest rates to buy the houses. It is a gigantic gamble

So the "rule" is that as interest rates go up, house prices go down. 

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