Do Price Reductions Signal Depreciation?
Dotcom Investors Lament $1 Million Losses – Even Though They Lost Nothing
After the infamous dotcom crash in the early 2000s, I frequently heard people lamenting their $1 million+ losses.
But – the actual losses were either far less or non-existent, as the lamenters had often paid very little for their stocks.
What they were actually lamenting was the fact they did not sell at the peak of the market – before the crash – when they were “worth millions.”
In other words, if someone bought $10,000 worth of air.com (that sold you air online in case free air was not enough) and the value of the stock went to $2 million before crashing to $0 – that person only lost $10,000 (not $1.99 million).
2008 Meltdown Survivors Lament Losses – Even Though They Lost Nothing
I saw the same thing happen after the 2008 meltdown.
I had one borrower in particular, who paid $250,000 for her home in the mid-1990s and used it like an ATM all the way up to the crash, when her home dropped from a peak of $1.2mm to $800,000.
She too would tell the world that she “lost half a million bucks,” when she actually lost nothing because she never sold the home (that she still owns to this day, along with the boats and cars her home helped her buy).
And – even if she had sold for $800,000, she still would have made $550,000 over her purchase price!
Price Reductions Galore!
I had dinner last night with an agent who has 8 listings that are all “not moving.” So, she is planning on sharing reality checks with her sellers – which means convincing them to lower the price.
None of those sellers are even close to losing money, but all of them are still looking in the rearview mirror** and expecting offers over asking price – spoiled by the all-too-frothy market conditions that existed until this spring.
**I am referencing Jason Hartman’s reminder that buyers always look down the road while sellers always look in the review mirror, resulting in market conditions like we are seeing today.
Overheard At The Gym…
I recently overheard one of the trainers at my gym in Texas lamenting his losses because he did not list his home sooner.
He, however, bought the home for around $400,000 in 2020 and put some sweat equity into it before listing it for $625,000 sometime this year.
He recently lowered the price by $26,000, and in his mind’s eyes, that is a loss.
Even if he put $50,000 into the home (pushing his cost/basis to $450,000) and sells it for only $575,000 – he will still make $90,000ish (after commissions).
And – a 20% return after only two years is nothing short of phenomenal!
So – the true reality check for all sellers is a reminder that any return over 5% is a gift.
Price Reduction From $1.8 Million To $1.6 Million
One of our managers just shared a $200,000 price reduction near her home, from $1.8 million to $1.6 million.
That is a lot, no doubt, but when we dug into the property a bit more, it looks like the sellers paid about $250,000 for it in 2000.
So, even with that enormous price reduction, those sellers will still see an almost 9% annualized return from their original purchase.
Normality and Reality Setting In (A Good Thing)
So, no – price reductions do not signal depreciation… yet.. and they won’t until we see people actually sell their homes for less than what they paid for them.
What we are seeing now is normality and reality setting in, and it is probably a good thing.
We are also seeing reminders that real estate remains a fantastic investment opportunity over time – even when the market is not frothy.
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