In a previous life, I was a student and teacher of history. I have always been intrigued by interesting times and the very interesting people who shaped them. We can learn so much from what these people said. Throughout the course of challenging times, we can take these lessons, these words, and apply them to what it is that we are currently working on. So, what would the great minds of our human past think of the current real estate market here, in Denver? We will explore that in this series of entries.
“To every action, there is always an opposed and equal reaction.” – Sir Isaac Newton
You all know this guy, right? Sir Isaac Newton did not just stumble upon the Law of Gravity by being hit in the head by a falling apple while sitting under a tree. He also invented the first reflecting telescope, refracted white light and surmised that it was made up of all the colors in the spectrum, as well as, being instrumental in the Scientific Revolution. Sir Isaac also got into a little bit of trouble by disproving the belief that the sun revolved around the Earth. That’s another story for another time, though. Without a doubt, Sir Isaac Newton was a very smart dude.
But what if he were to be sitting under a tree in Wash Park, contemplating the current home prices and values in the area? Newton, applying this law, would probably foresee housing prices decrease due to prices having been on the increase for an extended time. Of course, the Law of Gravity does not always directly apply to the housing market. Prices going up does not always eventually lead to prices coming back down. There is not a predetermined “top” of the market. There is, however, only so much weight that the market can bear, much like Newton’s mythical apple, eventually, gravity, whether it be natural or otherwise, will win out and pull an object, or in our situation, home prices downward.
Sir Isaac also may look at another action creating an opposed and equal reaction. When the Federal Reserve Bank announced this week that interest rates would be increased, and consequentially so would mortgage rates, the cost of borrowing became more expensive. We could see a decrease in demand, as potential buyers are forced to reconsider a mortgage at a higher interest rate, with higher monthly payments. To put it in terms of dollars and cents, the average home price in the US is around $234,000. Assuming a down payment of 10%, a homebuyer making this purchase would see an increase of 12% to their monthly mortgage payment from a 1 point increase in interest rate. It is important to note that another factor, the cash buyer, and investment buyer, are not completely unaffected by the increasing interest rate. Interest rates; whether they be high, low, or flat, affect every single one of us.
Both above scenarios are brought about because of one action, whether it be increasing home prices or increasing mortgage rates, bringing about an “opposed and equal” possible reaction by the market.