Thursday, February 26, 2009

Why the Stock Market May Drop to 3966

About three and a half years ago, during the Summer of 2005, which also happened to be the top of the real estate market, I sold a rental house for $629,000. A couple months ago, I found out the house went into foreclosure. A few weeks ago, I saw a Coldwell Banker for sale sign on the property. I decided to call them a week later to ask what the sales price was. I left a message with the office secretary.

A couple days later, the manager of the office called me back and said that the property had just been sold. She explained that it was a foreclosure and the bank had turned over all their local foreclosure properties to her office. She also said that she had plenty of other foreclosure properties she could offer to me.

I said to her "Can I ask what the sales price was?" and she responded "It sold for $175,000."

I was speechless. A drop from $629,000 to $175,000 is a drop of over 72% in just three and a half years!!! And what is really weird is that $175,000 is what I paid for the property 26 years ago! I still can't believe the price. I would have guessed $350,000 or maybe $275,000 at the absolute lowest.

Now for the comparison to the stock market. If we assume that the returns on the stock market may match the returns on real estate, maybe we can get an indication of where the market will go. If you look at that 72% drop in real estate, at least my real estate, then apply it to the highest level of the Dow Jones Industrial Average of 14,164 back in October 9, 2007, you would come up with a level of 3966.


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