I agree that interest rates are likely to stay low.
I find it ironic to think of as inflation as low, given that housing is way out of its historical pricing band relative to the model factors.
I remember when interest rates fell from 9% to 7% (early 90s). We had just bought a house for about $60K. Then interest rates fell, and house prices jumped, and suddenly our house was worth 90K. But if we had bought the same house at 90K at 7%, our monthly payments would have been the same.
I took a generic mortgage calculator and ran the numbers (30 year mortgage) on your house (first two rows), and on a South Florida townhouse that used to be mine (second two rows), to illustrate:
Price Rate Monthly Lifetime
60000 9 483 173798
90000 7 599 215558
142000 7 945 340000
309000 3 1303 468992
Note that the monthly payments are 24-37% higher in their after scenarios, even with a low, low interest rate for my townhouse. I see this scenario playing out over and over again and people assign the difference to interest rates when crunching the numbers suggests there's more to it.
But house prices have more to do with interest rates than inflation currently I suspect.
Very likely true. The financial crisis messed everything up. Driving interest rates down and QE stemmed the bleeding but it is only prolonging the pain. Possibly we are in a new normal of low-to-negative interest rates for the extended future. If this is the case, expect homes to continue to rise in value and for people with access to cheap capital to continue to pull away from everyone else.
I'm not optimistic interest rates will rise as inflation stays low. They tried raising rates last year and it shook the markets and there just doesn't seem to be a stomach for a prolonged reckoning.