Top Overvalued U.S. Housing Markets | Real Estate

In January 2020, when there was news of a novel coronavirus starting to circulate around the globe but no talk of disruptions to daily life in the U.S., the housing market was continuing to strengthen slowly. The median-price home was more affordable than renting, thanks to a very reasonable 30-year mortgage rate of 3.6{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} to 3.7{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}

Back then, the typical homeowner was paying 22{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of monthly per-capita income on mortgage payments, while the typical renter was paying 33{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of the same metric to the landlord. For many households, making the switch from renters to homeowners made great financial sense.

Flash forward to the end of 2022, and it was a different story for both groups of households. While the share of monthly per-capita incomes paid by tenants to landlords rose just a few percentage points to 36{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, for homeowners the amounts paid on principal and interest soared to 37{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}. This was in large part due to mortgage rates jumping to over 7{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} before settling around the mid-6{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} level. Per-capita incomes are estimated by dividing total population by personal incomes using data from the Census Bureau and the Bureau of Economic Analysis.

Because these are national median figures, these same ratios will vary a bit between markets, with some homeowners in California paying up to 67{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} for principal and interest alone, and renters paying up to 58{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}. Consequently, if the oft-repeated rule of thumb is to avoid paying more than 30{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of a household’s gross income on housing, then a number of metropolitan statistical areas are also overvalued based on local per-capita earnings.

Although it’s no surprise to see multiple regions in pricey California leading our list of the country’s most overvalued housing markets, also on the list are “Zoom towns” such as Boise, Greeley and even Salt Lake City, Utah. A Zoom town is an area which has experienced a large increase in remote workers over a short period of time.

If you’re a renter, while several MSAs in California remain on the most overvalued list, joining them are three markets in Florida as well as New York City, long one of the country’s priciest markets for renters.

According to the Department of Housing and Urban Development, households spending more than 30{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} of their gross monthly incomes on a place to live are “cost burdened,” since that leaves less room for spending on other necessities such as food, clothing, transportation and health insurance. While that 30{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} rule may not necessarily apply to households with higher incomes and lower debt, it’s still a useful barometer to rank just how expensive it is to live in some of the country’s priciest housing markets

For the purposes of this ranking, we chose November 2022, since that’s the most recent month for which we have comprehensive data from the U.S. News Housing Market Index. However, we encourage visitors investigating various housing markets to check back with the online interface for updates at least once per month. See the methodology here.

If you’re in the market to purchase a home, the following four MSAs (all in California) are by far the most overvalued, as they require a payment-to-income ratio of over 60{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, or twice the maximum rate recommended by HUD:

The top 20 most overvalued housing markets include not just high-priced MSAs in California, but also Idaho, Colorado and Utah. While some MSAs such as Myrtle Beach, South Carolina, and Las Vegas have payment-to-income ratios just over 40{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, that’s still 10 percentage points over the recommended maximum. Notably, even the U.S. median payment ratio of 36.6{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} is too high, suggesting that home prices have further to fall before the market can recover.

Despite the San Francisco-Oakland-Hayward MSA being ranked as the country’s most overvalued market, it does have some market strengths including low foreclosures, few mortgage delinquencies and a low vacancy rate for rental homes. However, those strengths are more than balanced by weaknesses including its high housing-to-income ratios and low builder sentiment.

Here’s a deeper look at the various data points regularly tracked by the Housing Market Interface for this MSA:

The overall Housing Market Index of 49.8 for the San Francisco MSA fell 8{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} year over year through November and comprises three subindexes on a point scale of 1-100, with 100 being the healthiest.

Learn more about these subindexes and the data points they track.

While the median price of a home here fell by 11.1{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} year over year, it still tips the national scales at $1.4 million. Although the price-to-income ratio at the end of 2021 stood at .49, as mortgage rates began to rise in 2022, by November the ratio had jumped to nearly .67.

At the moment, there are few signs of financial distress by homeowners, most of whom continue to enjoy mortgage rates below 4{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} to 5{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}.

The U.S. News Housing Media Analysis tool interprets the sentiment from over 500 U.S. housing news articles each month. Filters allow you to tailor media results to your region, time period, source or keyword.

In the case of the San Francisco MSA for the month of January, besides places including “San Francisco” and “California,” the most popular keywords include “renting,” “real estate pricing,” “affordable housing” and “apartment.”

In terms of place popularity keywords for January, San Francisco is followed by “United States,” “Los Angeles,” “San Jose” and “New York.”

Each month, there is an overwhelming amount of housing market news. Another U.S. News tool helps to understand and synthesize large volumes of housing-related media. This system then translates language into “sentiment” at the end of each business week.

This information is aggregated into a consolidated, interactive form that you can easily access and understand. Sentiment scores range from -1 to +1, with articles expressing the most negative sentiment earning a -1 and the articles expressing the most positive sentiment earning a +1.

The 5,000 articles in the image above that mention San Francisco had an average sentiment of -0.04 through January 20, which is more negative than the overall article average of -0.00. However, since mid-January, sentiment in the MSA is trending upward.

If you’re among the growing number of potential buyers waiting to decide on the right time to jump into the housing market, you may live in an MSA with an income-to-rent ratio far above the national median of nearly 36{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}. In terms of overvalued rental housing markets, this list is led again by several markets in California as well as in fast-growing Florida, where rent-to-income ratios range from well over 40{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} to 58{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}:

The Riverside-San Bernardino MSA is ranked as the most overvalued region to rent a home because its rental rates have risen faster than local incomes. Still, it does retain some key market strengths, including housing supply (this region of California has a significant amount of flat land on which to build), low levels of unemployment and mortgage delinquencies.

However, its primary weaknesses include its high rent-to-income ratio, low builder sentiment and household growth rising faster than building permits. Here’s a deeper look at the various data points regularly tracked by the Housing Market Interface for this MSA.

The overall Housing Market Index of 50.7 for the Riverside MSA fell 2.1{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} year over year through November.

Through November, the median observed rent price in the Riverside MSA rose 4{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} year over year to $2,554. Vacancy rates, which rose 1.5{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} year over year to a low rate of 3.4{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, may rise in the months ahead as new supply enters the market.

For those potential homebuyers looking to time their entry into the housing market, another metric to study is the difference between the cost of owning versus renting in a particular MSA. Where the difference between these ratios at the national level is about 1{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, for other MSAs it can reach over 30{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82}, leaving homeownership markets there open to mostly the wealthy or existing homeowners with equity to fund a large down payment on their next home.

Production note: Table 3 – MSA Ranked by Highest Percentage Difference Between Payment Ratios for Owning vs. Renting

The following five MSAs are markets in which the cost to own is nearly 16{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} to 38{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} higher than renting:

The U.S. News Housing Market Index is the most comprehensive collection of data points for the country’s largest Metropolitan Statistical Areas also easily available for free on the internet. This data is sourced from a variety of government and private sources and is referenced by clicking the i button next to an interface heading.

The overall index includes three subindexes:

The Demand HMI includes government data on employment, unemployment, household growth, consumer sentiment from the University of Michigan, median home sales prices from Redfin, and observed, smoothed housing rental prices from Zillow.

The Supply HMI includes government data on housing supply, rental vacancy rates, construction costs, construction jobs, builder sentiment from the National Association of Home Builders and architectural billings from the American Institute of Architects.

The Financial HMI includes government data on interest rates and access to credit, delinquencies and foreclosures from Black Knight, and ratios of monthly mortgage and rental payments to per-capita incomes calculated by the index. Monthly mortgage payments assume conventional financing with 20{73375d9cc0eb62eadf703eace8c5332f876cb0fdecf5a1aaee3be06b81bdcf82} down at the average monthly 30-year fixed rate reported by FreddieMac.

Per-capita income for each MSA was estimated for November 2022 using a proprietary formula incorporating the most recent annual Census Bureau data for July 2021 (and reported in December 2022), monthly national personal income growth from the Bureau of Economic Analysis, and a calculation of each MSA’s relative income growth performance versus the U.S. for the pre-pandemic years of 2016-2019. Those years were chosen to avoid the impacts of the federal government stimulus packages bestowed in 2020 and 2021, which would skew the results for each MSA.