Where are prices going?

Most people get the largest home loan they can qualify for. The loan amount that someone can qualify for depends on their income, their other debts, the interest rate, and the overall criteria used for loan qualification.  As we all know home prices increased dramatically in the period from 2004 to 2008. They increased because anyone could borrow pretty much any amount they wanted with very few questions being asked. Let’s assume that the current basis for loan qualification stays constant. Then the maximum amount that someone can borrow will depend on the interest rate and their verifiable income. The interest rate on home loans currently remains quite low. It probably won’t go down very much below where it has recently been. At some point we know it is going to go up. With everything else constant when interest rate goes up the amount you can borrow goes down. Over the longer term when interest rate goes up that usually indicates that the inflation rate is also going up. To keep up with inflation most people see an increase in their income. Higher income means the amount you can borrow goes up. In the near term I believe that prices will remain relatively flat. They could even go down if interest rates increase. Prices could also go down if unsold inventory goes up too quickly as banks release more foreclosed properties for sale. Over the long term I expect prices will go up slowly consistent with the increase in incomes but the home price increase will be nothing like what we’ve seen in the recent past.