<em>"Price is a function of the interest rate."</em>
I'd say that price is a function of supply and demand. If interest rates rise, some potential buyers will be excluded from the market, thereby reducing demand. In that sense, you're right, price is ultimately affected by interest rates because demand is reduced. Same with lending standards that require a down payment and a good credit history. More potential buyers are excluded, thereby driving down demand and ultimately prices. That's why the statistic to watch in the next several months is not median price or even interest rates, but decrease in sales. If the number of sales declines on a year-on-year basis, while inventory rises, supply is up, demand is down. Any first year economics student can then tell you that prices will then decrease.
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"We may have a new player....[US real estate is at a 20% discount because of the decline of the dollar v. the Euro.]"
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This means that the price just got a little lower, not that US housing is a good investment for Euro holders. In other words, this affects demand only if Euro holders decide to buy. With all the bad news in the US housing market, we can't necessarily assume that Euro holders will see US housing as a good investment. Also, an investor would face a substantial currency risk with a long position in residential real estate--even if the property does appreciate in 2-3 years and the investor can proftiably sell it, the gains could be wiped out by a weakening Euro. Remember, just a few years ago a US dollar bought 1.15 Euros, not 0.8 Euros as it does today. If the dollar moves back to 115, it would wipe out a 30% gain. Small investors buying individual houses are not in a position to hedge these risks with derivative instruments like swaps that large institutions use to hedge currency risk.