Very well thought-out post, sarasmom! Kudos to you!
expat_panama also made some good points! Kudos to you as well! But you forgot to add the real estate price graph.
The single most important bit of information contained in expat_panama's post was inferred in the charts. Charts are helpful and deceptive at the same time. [E]xpat_panama has no control over the charts. In 1997 -- before property speculators drove up housing costs -- interest rates were much higher. Price for house were much lower. More recently, interest rates were at historic lows. Prices for houses were much higher. What the hell is going on here?
Is it a mere coincidence that between 1997 and 2005 housing prices exploded over ten times in value? (E.g. Long Beach, California home was bought for $ 90,000 in 1997. Today it is selling for $ 890,000!).
Something is very weird here. Something stinks to high heaven. But I am not going to give it a name. I will not even attempt to dig into that. My message is just to quietly think about what has happened. Cogitate very carefully.
Hint: Lenders were playing speculator games. 'Nuff said.
More recently, interest rates were at historic lows. Prices for houses were much higher. What the hell is going on here?You're right, it really shouldn't be that way because homebuilding requires money. Other things being equal, if money is cheaper then homes should be cheaper. 
My take is that other things haven't been equal. Not all American home prices have been like that one in Long Beach you mentioned. In fact, most of the increase in the price of homes is caused by inflation. The reason why the cost of home building has more than doubled in 25 years is because the cost of everything else has too.
The next biggest reason home prices have gone up is the fact that people are richer and they want bigger homes. The Census Bur. says that this same 25 years has seen the average home size increase by 40%. Something else that the they say is that there's been a big increase in the quality of homes. Back then homes didn't have central air and built-in's. Now they do.