Monday, October 10, 2011

Asking Prices versus Sales Prices

Many folks are still convinced their homes are priceless.  But actual sales prices tell another story.

Two doors down from me, a house has been for sale for nearly two years now.  When your house is on the market for two years, it is not waiting "for the right buyer to come along" - it is overpriced.  They are asking $475,000 for the house, which is nice, but not as nice as mine, which I bought for about $50,000 less.

Four doors down, another house recently sold for $297,000.  Granted, it was a quick sale, and the house needed some updating.  But it illustrates what the houses on our block are actually worth.  And if you look at recent sales on the island, for homes not on the beach, prices in the high $200,000 to mid $300,000 range are moving, while the holdouts in the $400,000 range are sitting for years.

What is interesting to me about this scenario is that I saw the exact same thing happen in 1994.  Back then, a lot of people were bummed out that they bought at the peak of the market in 1989 and now their houses were worth a lot less.  So they put these joke prices on their homes and listed them - thinking that they could get more for their house than they paid for it - or even thinking that "any day now" the market would come roaring back and they would sell.

But it didn't work out that way, of course.  And while they listed high, actual sales were low.  And with foreclosures hitting the market steadily, housing prices were very depressed.  Does any of this sound familiar to you?

It took nearly seven years for the market to start to turn around from the 1989 debacle.  I was still buying foreclosure properties in 1995.  It wasn't until the 2000's that the market turned around, and unfortunately, entered yet another, bigger bubble.

The funny thing about this is, even rational people can't grasp it.  I mentioned this to my partner, who was a Real Estate Agent for many years and a co-investor in our properties.  "Well," he said, "our house is still worth a lot of money!" - and I nearly had to slap him.  Wake up!

No one wants to admit that they've lost money on an investment - it is human nature.  We buy stock in Dog Dung Inc. and watch it tank, and then hang onto it, hoping it will "come back" over time, so we can kid ourselves we didn't lose money.  But the stock tanks, and like with GM stock, many of us road it all the way to the bottom.

When we sold our vacation home, we probably lost $100,000.  That is a lot of money, to be sure.  But it was costing me $30,000 a year to carry it.  I could have gotten more money for it down the road - maybe - by carrying it for three or four more years.  But at $30,000 a year, it would have been a wash.  And given the seven years it took the last time around for prices to rebound, I think chances are I would have had to carry it a good long time to get my money back.

And not surprisingly, my neighbors were not happy that "I sold for so low" as it burst their own bubbles with regard to their home values.  But reality is reality, and what a house is worth is only what a buyer, willing and able, is willing to pay.  And in a lot of areas of the country, there are few "willing and able" buyers.  What you think your house is worth is not what it is worth.

And the key, I think, is accepting this calmly and with tranquility.  Being able to accept and perceive reality as it is, is a far better scenario than to keep living in a dream world of wishes and hopes.  Because, let's face it, what got us into this financial mess in the first place was a whole lot of people living in a dream world.

Reality is not scary or frightening.  It is, in fact, value-neutral.  It is what it is.  And if your house has gone down in value, so be it.  You can't do much about it, and denying it is just adding to your problems, not reducing them.

And this points to a fundamental truth about finances and investing.  Being able to perceive reality accurately is the key to personal financial success.  Folks like Warren Buffet don't become Billionaires by being "lucky" but rather by perceiving opportunity when others perceive risk.

On a personal level is this far more prosaic.  Being able to see through a lease agreement or a high-interest rate "miles" card is key to getting ahead personally.  And yet, many "successful" people, who put up the appearance of prosperity and wealth, tell me that such things are "bargains".  You scratch the surface a bit, and discover that they are horribly in debt and are forced to work long hours just to get themselves out of the jams caused by their own failure to perceive reality accurately.

And why do we lie to ourselves?  Well, lying is more fun, right?  You go to a car dealer and see a shiny new car and think, "Well, leasing does make sense!" - because you want to drive that car.  And you don't think about 36 months down the road, when you have to turn the car in and start walking - and pay thousands of dollars in excess wear fees.  Or 20 years down the road, after you've been making perpetual car payments and underfunding your 401(k).  You had fun now, and pay later.

Make friends with reality.  He may seem harsh and difficult at first.  But once you get to know him, you will realize that he is a pretty even-handed guy.  And moreover, since so few people make friends with him, you will discover you will make out like a bandit, compared to most of your peers.