Biz Week ran an interesting article yesterday:

If You Don’t Buy a House Now, You’re Stupid or Broke

The points the author makes have to do with historically low interest rates and the already crippled home prices. These are accurate and worthwhile considerations, but it’s also worth noting that the real estate markets will eventually adjust as interest rates rise. On the neighbor islands, we’re seeing markets where nearly 50% or more of the transactions are cash sales. We know there a lot of buyers with access to cash who are cleverly waiting for the right price points.

The relationship between property values and interest rates often receives too little attention. In fact, we could probably draw a fairly convincing thesis that too much attention on property values (and the assumption that they’ll always increase) and not enough attention on interest rates (and terms) was the recipe for the financial disaster that we’re experiencing today.

The simple reality is that if interest rates go up, property values will go down. For the great majority of the real estate market, home-buying power is essentially the ability to qualify for a mortgage. The credit market is constricting, and qualifying for a mortgage has only become more challenging over the last few years. The lack of available credit has already put pressure on the market (if you don’t believe that, try to sell vacant land in Hawaii right now).

If interest rates rise, then the monthly payments on the mortgage will rise, and the buyers simply won’t be able to purchase the property unless the price is lowered. Inevitably, this will create extreme downward pressure on real estate values nationwide. The only way to ease that pressure would be to open up the credit markets… but in light of recent events, that’s not too likely. So, for now, maybe we are Stupid or Broke (or both).