SARATOGA SPRINGS, N.Y. -- The years when thoroughbred horses were the hottest investment commodities in the world now seem like a dim, distant memory. Yet as recently as the mid-1980s, a 1-year-old colt was sold for $13.1 million; unexceptional horses were being valued at more than $10 million when they went to stud; a single stud fee for a great stallion could approach $1 million.

When the Saratoga Yearling Sales begin tonight, many of the prominent buyers and sellers will be the same people who dominated the action in the boom years. But none of them will be willing to pay such stratospheric prices now. The new realities of the market were demonstrated two weeks ago at the Keeneland Yearling Sale, where the average price of yearlings sold was $352,009 -- a sharp drop from last year's figure of $395,374. And that, of course, was far below the $601,487 record in 1984.

Rogers Beasley, Keeneland's director of sales, said he thinks the horse market has stabilized after so many years of wild gyrations. Last year, he pointed out, the biggest price was $2.8 million for a Northern Dancer yearling; this year a son of Seattle Slew commanded $2.9 million. "The top of the market is the same," Beasley said. "We think we're in a stabilizing process and not in a downward trend."

Why has the horse market changed so much from the go-go years? The great thoroughbred boom was a classic speculative mania; frenzied buyers thought that prices would go up, up, up forever, and they could rationalize paying more for a yearling than any racehorse in history had ever earned in competition. After the bubble burst, buyers regained control of their senses.

Another factor affecting the horse business was especially evident at Keeneland, where American buyers had virtually disappeared. The Maktoum brothers of Dubai accounted for more than one-third of the money spent at the entire sale. A Japanese buyer took the top-priced yearling. Only one American, trainer Wayne Lukas, was a significant participant and even he said, "I lost every {bidding} war." Beasley thought one explanation was the state of the American economy: "The horse business is part of the overall business picture," he said, "and people are feeling cautious."

However, Bill Oppenheim, editor of the newsletter Racing Update, suggested a more fundamental reason for Americans' caution about buying horses: tax laws. "The 1986 Tax Reform Act," he said, "was devastating to horse racing in this country."

This was not apparent at the time the measure was passed. The thoroughbred industry was in the throes of a severe crash at the time, and it was hard to sort out the effects of the new tax law. Moreover, people in the racing industry were wrongly preoccupied by the "passive loss" rules -- the provision that required an individual to be an active participant in a horse business to write off net losses. But time has shown that the reduction in the top tax rate to 28 percent has changed the nature of the horse business.

John Finney, the former president of the company that conducts the Saratoga yearling sales, once said that there were three reasons to buy a racehorse. Two were obvious: the glamour and excitement of the horse business, and the potential for making money. These ranked second and third on Finney's list. Tax benefits were No. 1.

In the days when tax rates were as high as 70 percent, a wealthy American could take an easygoing attitude toward losing investments. If he lost a dollar, 70 percent of the cost was borne by Uncle Sam, 30 percent by himself. Now that same affluent citizen is playing with real money. "With the tax rates at 28 percent," said Tom Aronson, president of the Racing Resources Group, "you're losing 72 cents on the dollar when you lose. People feel that where it hurts the most -- in their pocket."

When they are dealing with real money, rich people are much less likely to gamble by buying horses with seven-digit price tags. Middle-income people are less likely to buy cheap horses. A business executive who might have bought a $25,000 claiming horse to run in Maryland will be less likely to do so when Uncle Sam is not cushioning his losses. As a result, Aronson said, "The lower end of the market is desperately weak. A bad horse can result in a negative cash flow throughout his life. The lower level of the game is horse racing's bread and butter and that's where the real crisis is."

Take away the tax advantages and the value of horses is what they can earn on the track. Good horses can earn big money in American racing. A champion racehorse like Easy Goer or Sunday Silence can earn $4 million in a year, where just a few years ago it was a milestone when a horse passed $1 million in earnings for his career.

"Americans are looking at the correlation between what they will pay for a horse and what he can earn," Oppenheim said, "and as a result there's a lot of call for horses in the $150,000-to-$300,000 range, but very few people are willing to pay above that level."

He pointed out that on the day after its blue-ribbon select sale, Keeneland had an auction of less expensive horses, and American participation was brisk. This fall, Keeneland will conduct a sale that Oppenheim described as "the biggest in the history of horsedom" -- with 3,700 horses being auctioned in 11 days -- and the outlook for that sale is bullish, for it will feature the kind of horses that make economic sense to American buyers. While it is too risky for anybody to spend $1 million or more on a young prospect, and while cheap horses are usually money-burners, these mid-priced animals, the $50,000 and $100,000 yearlings, offer the best risk-reward ratio.

"When the fall sales are over," Oppenheim said, "we'll add everything up and we'll probably see that just as much money is being spent overall." It is just being spent on a different type of animal.

So the thoroughbred industry is pretty healthy and stable. But it has said farewell to the good old days when Uncle Sam would, in effect, subsidize losses and make possible the excesses of people who bought horses for prices that defied common sense.