Prior to the rise of remote work during the COVID-19 pandemic and the surge of desire for more living space in suburbs and in smaller towns, the U.S. housing market was reasonably balanced. In the early days of 2020, thanks to a 30-year, fixed-rate mortgage rate of 3.6%, a typical homeowner was paying about 22% of monthly per capita income on mortgage payments. However, the typical tenant was paying a much steeper 33% of monthly per capita income in rent, which was a great incentive for them to dive into homeownership.
That homeowner-to-renter advantage has since flipped. By May 2024, while the share of monthly per-capita income paid by renters edged up just over one percentage point to 34.4%, for homeowners it jumped to nearly 40%. This rise is due to a surge in home prices as well as mortgage rates briefly jumping to nearly 7.8% in October 2023 before gradually falling and ranging in recent weeks from about 6.8% to 7%.
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. As a result, with many homeowners and renters paying well in excess of the U.S. per capita income, a number of metropolitan statistical areas are likely overvalued based on local earnings.
For this analysis, monthly housing costs in excess of the national median per capita income for owning (39.8%) or renting (34.4%) suggest 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.
These rankings are based on data from May 2024, which provide the most recent and comprehensive data from the index. Visitors investigating various housing markets should check back with the online interface for updates at least once per month. See the methodology here.
[Related:2024-2029 Housing Market Predictions]
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 70%, or nearly 75% higher than the national rate of 39.8%:
— Kahului-Wailuku-Lahaina, Hawaii — 114.8%
— San Diego-Carlsbad — 73.9%
— San Francisco-Oakland-Hayward — 72.3%
— Los Angeles-Long Beach-Anaheim — 70.6%
— Riverside-San Bernardino-Ontario, California — 70.1%
However, the reasons for their rankings differ. For the Kahului-Wailuku-Lahaina MSA in Hawaii (which includes the inhabited islands of Maui, Lanai and most of Molokai) and the urban Honolulu MSA (including only the island of Oahu), even before the devastating fires of August 2023 on Maui, housing costs here were unusually high.
Firstly, a chronic housing shortage and an influx of second-home buyers and wealthy transplants have long been displacing residents. Secondly, the deadly 2023 wildfire that incinerated much of Maui’s coastal settlement of Lahaina has raised concerns that any homes rebuilt there will mostly target affluent investors buying second homes or income properties. This would only exacerbate one of Hawaii’s biggest challenges: the exodus and displacement of native Hawaiian and local-born residents who can no longer afford to live in their homeland.
On the supply side, the factors behind high housing costs include a remote location with steep shipping prices and delays for construction materials, which increase overall costs. In addition, there are geographic limitations to new housing on these mountainous islands and workers skilled in construction work are limited. On the demand side, factors for high housing costs include a highly competitive pool of local buyers in addition to retirees and investors from out of state who plan to rent out their homes for passive income.
For these out-of-state buyers, the ratios of their per capita incomes to monthly housing costs are most likely far below nearly 115%. However, for the typical Hawaii resident living in these MSAs, the cost to buy a home has become astronomical.
In the case of the California MSAs on the most overvalued list versus local per capita incomes, the state continues to grapple with a lengthy drought in housing supply matched to where the jobs are growing the most. To compensate, residents frequently double up with roommates, commute to more affordable suburbs far from employment centers (known as “drive until you qualify”) or, in some cases, leave the state altogether.
There are also a few overvalued MSAs in states including Washington, New York and Colorado with payment-to-income ratios nearly 50% and over. Due to homes becoming increasingly unaffordable to the average buyer, the U.S. median payment ratio of 39.8% is also too high, suggesting that if mortgage rates don’t decline, some asking home prices listed for sale will eventually have to adjust.
The Most Overvalued MSA to Buy a Home
While there are numerous reasons the housing market in the Kahului-Wailuku-Lahaina MSA housing market is overvalued compared with local per capita income, the primary one is because housing on Maui, known as “The Valley Isle,” is both popular and limited. Still, given recent surges in median sales prices, months of inventory have also climbed to levels indicating more of a buyer’s market.
Though the national median sales price of a home rose 4.8% year-over-year through May to nearly $439,000, in the Kahului MSA it surged 22.1% to approach $1.2 million — almost three times higher. In June the median sales price of a home in Kahului MSA jumped nearly another $100,000 to almost $1.3 million, versus about $443,000 nationally. Still, these rising prices are also leading to more inventory for sale, with the housing supply timeline in Kahului rising to 6.8 months in May versus just 2.4 months nationally (and in June rising further to 8.8 months versus 2.6 months nationally). If four to six months is considered a balanced market, Kahului is rapidly becoming a buyer’s market, and asking prices could soften over the next few months.
To address the housing shortage in the state, Hawaii Gov. Josh Green, who was sworn into office in December 2022, has made providing more dwelling units a cornerstone of his administration. In May 2024, his office hosted a signing ceremony for a series of bills focused on unlocking more housing throughout the state.
These bills include encouraging more accessory dwelling units (ADUs) on all lots currently zoned for residential development, prohibiting private covenants (such as HOA covenants, conditions and restrictions) from restricting ADUs, expediting the approval process for more affordable housing units by making it easier to seek exemptions from certain state laws and rules, allowing for the adaptive reuse of underutilized commercial spaces and office buildings for housing, issuing bonds to finance housing-related regional infrastructure projects (particularly in areas close to public transit) and funding a new task force to continue guiding long-range plans.
Another series of bills signed in May are intended to “streamline processes, enhance management practices and increase accessibility to clean energy programs for condominium communities” throughout the state, thereby encouraging more new condominium production. Although more than 60,000 new housing units are in the pipeline (including 13,000 affordable housing units proposed by 2026), it will take some time for these homes to be completed, sold or rented.
Overvalued Homes for Rent
If you’re waiting for mortgage rates to subside further to decide on the right time to jump into the housing market, you should find out if you live in an MSA with an rent-to-income ratio far above the national median of 34.4%, which could make the leap to homeownership easier. In terms of overvalued rental housing markets, this list is led again by two markets in Hawaii as well as in California’s Riverside-San Bernardino-Ontario (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 45% to over 70%:
— Kahului — 70.3%
— Riverside-San Bernardino-Ontario, California — 57.7%
— Urban Honolulu — 48.4%
— San Diego-Chula Vista-Carlsbad — 45.4%
— New York-Newark-New Jersey, NY-NJ-PA — 44.6%
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 May 2024, the national median asking rent increased 3.4% year-over-year to $2,042 per month. By comparison, rents in the Kahului MSA jumped 15.5% year-over-year to $3,838 per month, or 187% higher.
In addition to the May housing bills signed into law, during that month Gov. Green also approved another bill giving the state’s counties more authority in regulating short-term rentals in their communities. The rise of short-term rentals in the state (including illegal units being operated where they are not authorized) has been partially blamed for the lack of affordable housing options targeted toward long-term residents.
Owning vs. Renting
If you’re looking to determine the best time to enter the housing market, another metric to study is the difference between the cost of owning versus renting in a particular MSA. Notably, whereas the difference between these ratios for the entire country is just 5.4%, for other MSAs it can reach well over 40%. In these markets, the ability to buy a home is open to mostly the wealthy or existing homeowners with sufficient equity to carry over a large down payment to their next home.
The following six MSAs (with a tie for fifth place) are those in which the cost to own is nearly 28% to over 45% higher than renting:
— San Francisco-Oakland-Berkeley — 45.5%
— Kahului-Wailuku-Lahaina, Hawaii — 44.5%
— San Jose-Sunnyvale-Santa Clara, California– 41.3%
— San Diego-Chula Vista-Carlsbad — 28.4%
— Seattle-Tacoma-Bellevue — 27.9% (Tie)
— Los Angeles-Long Beach-Anaheim — 27.9% (Tie)
Interested in the most undervalued housing markets in the U.S.? Stay tuned for the next article in this series featuring the U.S. News Housing Market Index.
Methodology
The U.S. News Housing Market Index is the most comprehensive collection of data points for the country’s largest metropolitan statistical areas that is also available for free on the internet. This data is sourced from a variety of government and private sources.
The overall index includes four subindexes:
The Demand HMI includes government data on employment, unemployment, household growth, building permits, 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 local 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.
For the purpose of these rankings, per capita income for each MSA was estimated through May 2024 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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Most Overvalued U.S. Housing Markets originally appeared on usnews.com
Update 07/31/24: This story was previously published at an earlier date and has been updated with new information.
