I think it's both. Ultimitly, a home will rise in value due to a few things such as improvements, inflation, or a certain area becoming a hot/cold real estate l

I think it's both. Ultimitly, a home will rise in value due to a few things such as improvements, inflation, or a certain area becoming a hot/cold real estate location. However, the ultimate selling price for a home is going to be greatly affected by interest rates. We've seen it in the last year where rates have gone 1% since a year ago, you've seen houses rise in value quite a bit and in proportion to that. 1% difference on a 30 year term is pretty significant and will be noticeable on the monthly payment. Even though some people can or do pay cash for a home, they are not a significant population. Very often people that can pay cash will make a cash bid, prove they have it and still get a mortgage because money is cheap and the opportunity cost of trading that money for a house is generally unfavorable. A home is generally a market lagging investment when considering maintenance and taxes. Throw in interest and it's a lousy investment but you can live in it so it's rational depending on your lifestyle. What people can afford in an area they want to live is what prices homes - taxes, mortgage rates, and price combine to generate a monthly payment that people are willing to pay. That's how the market works. In some areas the price can outpace the other 2 if wages are rising, like we've seen in SV for awhile now. But that's the exception and not the rule.