In the pre-pandemic days of late 2019 and early 2020, on a national level the U.S. housing market was reasonably balanced. With a 30-year, fixed-rate mortgage rate of 3.6%, the typical homeowner was paying just 22% of monthly per capita income on mortgage payments. Meanwhile, the typical tenant was paying a much steeper 33% of monthly per capita income on rent, thereby providing a great incentive to dive into homeownership.
By the end of 2023, while the share of monthly per capita incomes paid by tenants to landlords rose just a few percentage points to 36%, for homeowners it soared to 39%. This was mostly due to rapidly rising home prices as well as mortgage rates briefly jumping to nearly 7.8% before gradually falling. Most recently, rates have been ranging from about 6.6% to 6.9%
As these are national figures, these ratios can vary widely between markets, with some homeowners paying up to two-thirds or more of local per capita incomes for principal and interest alone, and renters paying well over half. With many homeowners and renters paying well in excess of the national ratios of per capita incomes to housing costs, a number of metropolitan statistical areas (MSAs) are likely overvalued based on local earnings.
For this analysis, areas in excess of the national ratio of per capita income to monthly housing costs for owning (39.1%) or renting (35.7%) indicate an overvalued market. Our data for these rankings are primarily sourced from the U.S. News Housing Market Index, an interactive platform providing a data-driven overview of the housing market nationwide.
Some new markets added to the Housing Market Index since last November include Albuquerque, New Mexico, and two MSAs in Hawaii including Kahului-Wailuku-Lahaina and urban Honolulu.
These rankings are based on data from November 2023. If you’re following various housing markets, check back with the online interface for updates at least once per month. See the methodology here.
[2024-2028 Housing Market Predictions: A Gradual Thaw With Added Challenges]
Overvalued Homes for Sale
If you’re looking to purchase a home, the following five MSAs are by far the most overvalued compared with local per capita incomes, as they require a payment-to-income ratio of over 66%, or nearly 70% or more than the national rate of 39%:
— Kahului-Wailuku-Lahaina, Hawaii — 95.3%
— San Diego-Carlsbad — 70.0%
— San Francisco-Oakland-Hayward — 69.8%
— Los Angeles-Long Beach-Anaheim — 66.1%
— Riverside-San Bernardino-Ontario, California — 66.0%
Notably, the reasons for their rankings are not necessarily the same. In the case of the Hawaii MSA of Kahului-Wailuku-Lahaina (which includes the inhabited islands of Maui, Lanai and most of Molokai), even prior to the devastating Maui fires of August 2023, a unique combination of factors was contributing to the high costs of housing.
A longtime chronic housing shortage fueled by an influx of short-term rental investors, second-home buyers and wealthy retirees had been displacing residents to the extent that Gov. Josh Green has continued to make affordable housing a critical priority. Even though this housing challenge was in place for years prior to his inauguration in December 2022, his mission is simple: to stop the exodus and displacement of Native Hawaiian and local-born residents who can no longer afford to live in their homeland.
For these out-of-state buyers, the ratios of their personal per capita incomes to monthly housing costs in Kahului are most likely well below 95.3%. However, for the typical Hawaii resident living in these MSAs, the costs to buy a home have become astronomical.
In addition, affordable housing is needed for the vast army of public servants including teachers, nurses, firefighters and members of law enforcement throughout the state. For the more immediate needs of the estimated 5,000 people displaced from last summer’s wildfire, currently staying in hotels on the islands of Maui and Oahu, Green is encouraging owners of Maui’s vacation rentals to provide these evacuees long-term housing. Rents will be paid by the Federal Emergency Management Agency (FEMA) and various charitable organizations.
On the supply side, factors contributing to high housing costs include a remote location with steep shipping prices and delays for construction materials, which increase overall costs, geographic limitations to where new housing can be built and competition for skilled workers.
In the case of the California MSAs on the list , the state continues to underbuild housing matched to local job growth, thereby forcing residents to commute from more affordable suburbs far from employment centers, live with unrelated roommates or, increasingly, to leave the state altogether.
The Most Overvalued MSA to Buy a Home
While there are numerous reasons the housing market in the Kahului-Wailuku-Lahaina MSA is so overvalued compared with local per capita incomes, the primary one is because the state is both popular and expensive. Although this market has 42% more housing supply based on sales and inventory totals versus the national average, and few mortgage delinquencies, other weaknesses include a higher ratio of foreclosures versus the national average and a low ratio of building permits to employment growth.
Here’s a deeper look at the various data points regularly tracked by the Housing Market Interface for this MSA:
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The overall Housing Market Index of 48.9 for the Kahului MSA fell 5.2% year-over-year through October and is comprised of three subindexes on a 1-100 point scale, with 100 being the healthiest.
Demand HMI — 41.0 Supply HMI — 48.1 Financial — 60.1
Learn more about these subindexes and the data points they track.
Through November, the national median price of a home rose 3.6% year-over-year to $408,369, while in the Kahului MSA it rose 4.7% to $1.010 million, or nearly 2.5 times higher. With an inventory timeline of 2.9 months in the U.S. but 6.8 months in the MSA in November, if four to six months is considered in balance, then Kahului has recently become more of a buyer’s market.
Despite the increase in housing supply, there are few signs of financial distress by homeowners, with most of them benefiting from mortgage rates well below 6%.
However, although Kahului’s October delinquency rate of 1.7% was significantly lower than the U.S. average of 3.17%, its foreclosure level of 0.8% was about double the national rate. Although these foreclosure rates are low by historical standards, they do bear watching in the months ahead.
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Looking ahead to 2024 and beyond, the only long-term answer to Kahului’s housing prices is more supply. While Gov. Green’s efforts to spur more new home construction
are gradually gaining traction, it will take some time for these units to be completed.
According to projections through mid-2024, although we can currently expect about 33 new single-family building permits per month, the forecast for new multifamily units is much more volatile because these larger projects take more time to plan.
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Overvalued Homes for Rent
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 a rent-to-income ratio far above the national median of nearly 36%.
In terms of overvalued rental housing markets, this list is led by two markets in Hawaii as well as in California’s Riverside-San Bernardino-Ontario MSA (which includes the “Inland Empire” east of Los Angeles), San Diego and New York City. In these markets, rent-to-per capita income ratios range from nearly 46% to 65%:
— Kahului-Wailuku-Lahaina, Hawaii — 64.7%
— Riverside-San Bernardino-Ontario, California — 57.0%
— Urban Honolulu — 50.6%
— San Diego-Chula Vista-Carlsbad — 49.3%
— New York-Newark-Jersey City — 45.7%
The Most Overvalued MSA to Rent a Home
Besides being ranked as the most overvalued market to buy a home, the Kahului MSA also ranks at the most overvalued region to rent a home because its rental rates have risen faster than local incomes.
As of November 2023, the national median asking rent increased 3.3% year-over-year to $1,982 per month. By comparison, rents in the Kahului MSA rose 2.8% year-over-year to $3,337 per month, or 168% higher.
Owning Vs. Renting
For those potential homebuyers looking to time entering 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 just over 4.7%, for other MSAs it can reach well over 25%, leaving the homeownership markets there open to mostly wealthier buyers or existing homeowners with equity to fund a large down payment on their next home.
The following five MSAs are markets in which the cost to own is nearly 28% to 46% higher than renting:
— San Francisco-Oakland-Berkeley — 45.8%
— Kahului-Wailuku-Lahaina, Hawaii — 42.2%
— San Jose-Sunnyvale-Santa Clara, California — 36.8%
— Los Angeles-Long Beach-Anaheim — 28.8%
— San Diego-Chula Vista-Carlsbad — 27.7%
[Here’s What Rent Costs Around the U.S.]
Methodology
The U.S. News Housing Market Index is the most comprehensive collection of data points for the country’s largest metropolitan statistical areas, and 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 four 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% down at the average monthly 30-year fixed rate reported by Freddie Mac.
Per capita income for each MSA was estimated through November 2023 using a proprietary formula incorporating the most recent annual Census Bureau data for July 2022 (and reported in December 2023), monthly national personal income growth from the Bureau of Economic Analysis, and a calculation of each MSA’s relative per capita income growth versus the U.S. for 2020 through 2022.
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The Most Overvalued Housing Markets in the U.S. originally appeared on usnews.com
Update 01/30/24: This story was previously published at an earlier date and has been updated with new information.
