No. 1 Buy Strategy for 2023

Charles drives home a point that I myself have made throughout 2022: Stocks aren’t cheap. At all.

Even at the low point of the year, when the S&P 500 was down 26%, we didn’t get the reset we needed for stocks to be truly cheap by any objective measure. The pandemic bubble inflated stock valuations to levels that might take years to properly deflate.

Of course, stocks aren’t the only asset class with a valuation problem. If you’ve been house shopping over the past few years, you likely had sticker shock.

Home prices exploded higher during the pandemic. All real estate markets are local, of course, but for a quick-and-dirty gauge of the housing market as a whole, consider that the S&P CoreLogic Case-Shiller 20-City House Price Index rose 41% between June 2020 and June 2022.

That would be a big move for the stock market, let alone the housing market.

The drop in mortgage rates during the pandemic helped drive this, of course. Most Americans budget based on their monthly billing cycle, and a drop in mortgage rates can keep the monthly payment more or less affordable even if the purchase price is dramatically higher.

Of course, that’s only sustainable if mortgage rates drop ever lower … and that’s not exactly what happened in 2022. The average 30-year mortgage started the year at just over 3%. By November, the average rate exploded to over 7%.

They’ve since come down slightly, but as I write this the average mortgage is still well over 6%, fully double the rate at the start of the year.

The National Association of Realtors created a Home Affordability Index that measures the degree to which a typical family can afford the monthly mortgage payments on a typical home.

A value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home — and a value below 100 means that a family earning the median income would not qualify for a mortgage on the median-priced home.

Well, at the beginning of this year, despite two years of torrid price appreciation, houses still remained affordable in most markets. At the end of last year, the index read 142. But as rates continued to rise throughout 2022, affordability went into reverse … and as of October, the last month for which we have data, the index read just 91.

And this is happening despite a decrease in home prices.

The S&P CoreLogic Case-Shiller 20-city house price index fell 0.5% in October, the last month for which we have data. This is the fourth consecutive monthly decline.

Overall, prices have fallen about 4%.

That might not sound like much, but it amounts to $20,000 on a $500,000 house, or enough to wipe out a good chunk of the equity in a recent purchase. And 4% is a broad average of 20 major U.S. cities. San Francisco and Seattle have both seen prices decline more than 10% from their peaks.

I don’t necessarily see the bottom falling out, as we saw the last time the housing market collapsed. Between 2006 and 2009, the 20-city house price index dropped a good 30%. Lending standards were higher this time around, and the typical buyer today has more skin in the game.

Still, something has to give. In order to have a functioning housing market again, either mortgage rates or home prices — or both! — need to fall significantly.

If you’re itching to buy an investment property, be patient here. You’re fighting the trend at this point. I’d recommend waiting a minimum of another six months. By then, prices could be another 5% to 10% lower, and if we get a recession, it’s likely that mortgage rates will also be lower.

Charles Sizemore Chief Editor, The Banyan Edge