People say interest rates are low, so it's a good time to buy a house. So of course in my contrary way, a couple months ago I decided to rent instead.

I'm no expert in real estate, but I have never seen any hard data suggesting that real estate has a better return in the long run than the stock market. Therefore, unless someone can provide hard data otherwise, investment isn't a good reason to buy a house. Besides, houses aren't very liquid and you live in them. To beat the stock market, if you reinvest your dividends, the S&P 500 grows about 11% per year. That's pretty high, even adjusted for inflation.

So anyway, why, if interest rates are low, do I think it's a particularly bad time to buy a house? Well, it basically goes like this: In any particular area, there are a number of people at any given time who want to buy houses. Let's assume right now that these people aren't getting huge raises or pay cuts. In that case they have a certain amount of money they can contribute to housing. That number doesn't change all that much. A friend of my family, who has been in real estate for a long time, says that when interest rates go up, prices go down, and vice versa. I bet, keeping the pay assumptions above, that interest and price adjust with each other, generally, enough to keep monthly payments about the same.

So this means that if interest rates are extremely low, as they are now, then the price of the house is going to be pretty high, relatively. Now, one key fact I learned when selling my condo earlier this year is that it costs a lot to sell a house, something like 7 or 8% of the selling price. So even if your house's price stays the same or goes up a bit, you may lose it on selling. But think about it--if your house is bought at a low interest rate and high price, the interest rate doesn't have very much room to decrease (it can't go below 0%), but it has a lot of room to increase (in the 80s rates were in the double digits). So there is a considerable risk the price will go down and you'll be sitting on a house you owe more on than it's worth, because people can only afford a certain amount per month no matter what.

Further, if you have a bunch of people saying, "it's a good time to buy because the interest rates are low," that sounds like it would increase the demand somewhat. If demand increases, then the amount of money people are willing to pay per month might actually increase, meaning it's even worse.