Almost 11 years ago, Randy Befumo wrote an article here in Fooldom that has stuck with me. "My God -- The House Is Down Again!?" offered a little science fiction for investors: What if houses traded like stocks, and you could watch the value of your home fluctuate daily?
One of the lessons it imparted was to help the reader see how silly such a scenario would be. Reading it, I thought to myself, "Of course I'd never do that. When I buy a house, it will be a long-term investment. When its value rises or falls a bit, I won't freak out, because it's my ultimate selling price that matters, and that's many years away. Over those years, I expect the house to appreciate."
That's also, to a great degree, how we should think about our stocks. If you buy shares of Disney
Keep your stock hat on
The reason why I recalled Randy's article is because I read part of a Wall Street Journal article that touched on rising foreclosure rates. It noted that:
- In a San Diego sale recently, foreclosed houses and condos went for about 30% less than the previous sale or appraisal prices. Some homes saw discounts of 50%.
- In Oceanside, Calif., a four-bedroom home went for $495,000 at an auction, a full third less than its sale price a year and a half ago.
Seeing these numbers made me suspect that many people will get overly excited by them. It may be true that a home is being sold for 25% less than it sold for last year, but you shouldn't assume that it's therefore a bargain. Just as with stocks, the past prices are much less important than the present and future.
If a stock falls 25% from its 52-week high, that doesn't mean it's 25% undervalued or that it will soon (or ever) regain that lost ground. What matters is the stock (and its underlying company) itself. You need to know more about it and its prospects. You need to have an idea of what kind of valuation you expect in the future. Some stocks -- and homes -- are currently selling for considerably less than they're worth. Others, even though they've fallen in value, are actually trading for roughly what they're worth!
Real estate, just like stock investing, isn't rocket science, but it does have intricacies worth learning about. If you're interested in home-buying and selling issues, visit our Home Center, which features lots of money-saving tips on mortgages and other issues. You might also want to check out these articles, especially if you'll soon be buying a new home:
Longtime Fool contributor Selena Maranjian owns shares of Amgen. Disney is a Stock Advisor recommendation. Try any of our investing services free for 30 days. The Motley Fool is Fools writing for Fools.