Understanding the Performance Gap Between Stock and Housing Markets in 2023
In 2023, stocks significantly outperformed housing, showing a dramatic reversal from the previous year. While stocks soared, with the Wilshire 5000-stock index climbing an impressive 25%, home prices saw modest increases, with the Federal Housing Finance Agency US index rising by just 5% annually as of September.
Stocks Soar in 2023
In the context of the past half-century, the stock market’s performance in 2023 was quite remarkable, only exceeded by 12 other years since 1974. This surge came as a pleasant surprise after investors initially braced for a possible recession early in the year. Thankfully, by late 2023, a more optimistic sentiment had taken hold, boosting confidence in a milder economic downturn for 2024, which fueled the year’s stock gains.
Home Prices in 2023
The real estate market experienced slower growth compared to stocks. Despite fears of an economic downturn, home prices still rose by 5%, which is considered moderate. This uptick in home prices reflects a market that, while benefiting from an improving economic outlook, typically doesn't match the volatile highs and lows of the stock market.
Contrast with 2022
Looking back, 2022 was an entirely different scene. The stock market faced its fourth-worst plunge in 50 years, falling 20%. In contrast, the housing market was largely unfazed, continuing to grow by 12%, marking its fifth-best year. This revealed a staggering performance gap, with stocks and housing diverging substantially during economic uncertainty.
Historical Trends
When examining the historical performance, it's not uncommon to see significant differences between stocks and housing prices. Generally, stocks tend to yield an average annual gain of 10% versus housing’s average appreciation of 5%. The stock market is also more prone to downturns with a 29% chance of price drops over any given year, as opposed to a 10% chance for the housing market. The historical volatility of the stock market is made evident when considering that the best and worst years had a difference in performance of 72 percentage points, while the corresponding figure for housing is much lower at 25 points.
Narrowing the Performance Gap
To achieve a smaller gap between stock and home performances, it requires near-optimal economic conditions. Analyzing years with the smallest gaps shows robust job creation and more moderate inflation rates. In such climates, stock gains are slightly below their average, and home prices above theirs. Conversely, when the economic times are tougher, stocks seem to fare better, perhaps because stock traders often place bets anticipating future improvements, whereas homebuyers seek stability.
stocks, housing, economy