I have seen this type of analysis before and it makes perfect sense. Home buyers are more focused on monthly payments than on purchase price. Employees are paid every couple of weeks. They qualify for a mortgage based on their monthly income versus monthly mortgage payment. When interest rates go down, house prices tend to go up because buyers have the ability to pay a higher purchase price with the same monthly payment.
After adjusting for both interest rates and inflation, housing prices are kind of flat, long term, with some ups and downs. Prices went above the 100 mark on the Real Mortgage Payment Price Index (see the graphs in the article linked below) before 2007 then corrected after the crash.
So if prices go up when interest rates go down, it seems like we should expect prices to go down (or stay flat several years) when interest rates go up.
Seattle and Portland look overpriced when you consider this kind of analysis. They are also overpriced if you consider cap rates or (the somewhat cruder) ratio of price versus rent. Rent versus price is cruder because it doesn’t account for homeowner’s association dues, differences in taxes, insurance, and age (which affects annual maintenance cost). But looking at an average rent versus price ratio for a whole city gives you a good picture of whether the city is overpriced or underpriced.
Spokane, Coeur d’Alene, and Boise, are too small to make this list but I’m sure we are well above the 100 mark as well.
The big question is when the Fed will tighten, and if they will crash things hard and bring us back to the 100 mark on the “Real Mortgage Payment Price Index.” Evergrande contagion may come too, though probably more to the financial markets. And if the stock markets tank, will the Fed delay their tightening? They don’t have a mandate to save the stock market but seem to put significant effort into listening to the stock market.