A few days ago, I ran across a real estate listing for a home in my city.  I recognized the property and knew that the owners had been asking for $ 300,000 for the past three to four years.  I also knew they had received several offers on the home, including one that was roughly $ 275,000 to $ 285,000.  At the time, these homeowners had turned down the offer because they insisted they must have $ 300,000.

That is a rational way to behave if you factor in the time value of money.  Every merchant in the world can tell you that investing in real estate is just like investing in inventory to re-sell to customers.  The longer something remains in stock, the less valuable it becomes due to inflation.  A dollar is not a fixed unit of value.  The value of dollars, expressed in what it can buy, fluctuates over time.

Going back to our homeowners, the practical implications of their failure to consider the time value of money on their real estate investment was huge for their pocketbook.  Since they first listed the home, what cost $ 300,000 then would cost $ 315,100 now.  That means from a time value of money perspective, accepting $ 284,900 for the house three years ago would be the same as getting $ 300,000 for it today.

But they wouldn’t sell.  They wanted their $ 300,000.  They held on for their $ 300,000.  Factoring in time, they are in the same economic position they would have been had they accepted $ 284,900 three years ago.  They would have already moved into their dream home.  Instead, they are still stuck, refusing to budge on price not realizing that $ 1 today isn’t the same as $ 1 three years ago.  It is worth less purchasing power.

People don’t think that way.  That is why most people struggle with money.  They don’t understand it beyond basic debits and credits.

The Money Illusion Applies To Real Estate Investments, Too originally appeared on About.com Investing for Beginners on Saturday, December 31st, 2011 at 18:20:26.