I think it's because most people don't decide how much house they can afford based on the purchase price. They decide based on the monthly payment. Obviously, as the interest rate declines, they can buy more for the same monthly payment. Therefore house prices go up, because everyone can pay more for the same monthly payment.

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 agree that monthly payment is the key factor people consider. I think there's more to it than interest rates, though, let me demonstrate:

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.

Money is cheap. Homes in particular rely a lot on financing. Goods that don’t rely on financing are relatively cheap since inflation has been so low. I believe in part because money is so cheap currently that businesses are able to sell bonds cheaply to finance their operation. Because of this the savings are passed down to consumers.

But house prices have more to do with interest rates than inflation currently I suspect.