re: How inversely related are housing prices and interest rates?

I've seen the stats before, just can't remember them. The National Association of Realtors posted falling median and average home prices for several consecutive years. So, on AVERAGE, yes, with rates this low, it is the best time to buy a home because you are paying less for more home than 5-7 years ago.

All markets are different, though and some buck the trend. There are many cities in which home prices have continually risen during the recession. If you're in one of these cities, prices are higher, but you'll still probably never be able to get interest rates like this for the next 20+ years (barring total economic collapse and assuming some type of recovery).

The reason this is viable is because it's a buyer's market. Obtaining financing is so difficult, the pool of buyers is much smaller than it could be. Due to this, sellers have to lower prices to compete. Fewer mortgages, lower interest rates to entice investors to pick them up.

If a higher percentage of people were able to buy homes, then there would be more competition over these homes, thereby creating a seller's market. Prices would then increase and your scenario would be correct. BUT, then investors would start to flood the bond market....making rates go up.