Borrower Laments False Poverty (“I Lost $250,000!”)
After the 2008 meltdown, a borrower told me how sad she and her husband were because they lost $250,000.
They bought their home in the 1990s for $300,000 and watched it appreciate to $1 million by 2006ish.
Interestingly, they pulled cash out every 18 months to buy boats, jet skis, new cars and vacations (they loved cruises) – and yes, I encouraged her not to keep borrowing and referred to my financial planner numerous times because I knew he would put her on a spending/savings plan. But – they just kept on borrowing and spending, convinced that homes would appreciate forever and that rates would fall forever (not so much).
Long story short: after the market bottomed out, the couple’s mortgage balance exceeded their home value – and they thought they were poor. But, they actually had not lost anything, given that their home was still worth $450,000 more than what they originally paid. They only “lost” some of their appreciation.
The above story is not unique, as thousands (if not millions) of other borrowers had a similar experience – and it illustrates two things: (1) it a great example of how asset (either stocks or real estate) appreciation fuels spending in our economy – that dries up when asset prices fall, causing recessions; and (2) it is a great example of how asset appreciation makes people feel wealthier and more comfortable than they might otherwise feel.
NASDAQ Correction Freezes Borrowers
I thought of the above story when looking at the Nasdaq index recently (the Nasdaq is the stock exchange in which most of the major tech stocks are traded).
This graph shows the 5-year history of the Nasdaq composite index. It was close to 10,000 right before COVID hit in 2020, and it plummeted to under 7,000 after COVID hit.
But, like most people, tech firms did very well during COVID and the Nasdaq started to climb in response – peaking at over 16,000 last year!
Now, the Nasdaq is somewhere around 14,000, and a lot of our borrowers are feeling “poor.”
But are they? Not really, given that most of them still remain as much as 40% better than they were prior to COVID.
It is all a matter of perspective of course – and many borrowers seem all too focused on their “losses” from peak appreciation as opposed to losses from time of purchase.
And – we are seeing this now, as many borrowers are licking their wounds and adjusting to the recent Nasdaq corrections – and deferring homebuying as a result (something we are seeing right now with many of our pre-approved borrowers).
This is something I have seen numerous times over the years too.
So, I always encourage agents and our team to put “losses” into perspective and to remember that most of us have not lost anything at all.
And finally, the reason the Nasdaq stocks seem to impact real estate more than stocks in other industries is because the average homebuyer is in her early 30s, and people of that generation are more likely to invest in the type of stocks (mostly tech) in the Nasdaq.
Founder/Broker | JVM Lending
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