The Most Overvalued U.S. Housing Markets

It wasn’t that long ago that the housing market was fairly balanced, and many households could jump on that first step of the homeownership ladder. Five years ago, during the first part of 2020 — thanks to a fixed-rate mortgage of 3.6% for a 30-year, fixed-rate loan — a typical homeowner was paying well under 25% of per capita income for mortgage principal and interest. At the same time, with the typical tenant paying a much steeper 33% of monthly per capita income in rent, this was a great incentive for them to dive into homeownership.

This incentive to buy a home was enhanced even more when mortgage rates dipped to generational lows in late 2020. However, when pandemic-related inflation took off in mid-2021 and mortgage rates rose to attract investors, many existing homeowners opted to stay in place and enjoy their low rates versus moving elsewhere. This stubborn lock-in effect has not only greatly restricted the inventory of existing homes for sale, but also kept home prices high enough to remain unaffordable for most first-time buyers as well as unattractive for homeowners looking to move up.

By November 2024, while the share of monthly per capita income paid by renters fell by 1 percentage point to 32.0%, for homeowners it jumped to nearly 36%. While the good news is that income gains, increasing supply and mortgage rates have led to lower income-to-housing costs nationally versus the last quarter of 2023, they’re still significantly higher than in early 2000.

As these are national figures, these ratios can vary widely between markets, with some homeowners paying up to 66% or more of local per capita incomes for principal and interest alone, and renters paying well over 40%. 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 (36.3%) or renting (32.0%) suggest an overvalued market. Our data for these rankings is 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 November 2024, which is 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.

[2025-2029 Five-Year 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 income, as they require a payment-to-income ratio of 66% and over, or nearly two-thirds higher than the national rate of 36.3%:

— Kahului-Wailuku-Lahaina, Hawaii — 115.4%

— San Francisco-Oakland-Hayward — 68.3%

— Riverside-San Bernardino-Ontario, California — 67.8%

— San Diego-Carlsbad — 66.3%

— Los Angeles-Long Beach-Anaheim — 66.0%

For the Kahului-Wailuku-Lahaina MSA in Hawaii (which includes the inhabited islands of Maui, Lanai and most of Molokai) — even before the devastating fires of August 2023 that destroyed more than 2,000 dwellings and displaced 12,000 residents — there were other long-standing reasons for the high costs of housing.

On the supply side, a remote location with the added complexities of steep shipping prices and delays for construction materials add to costs, as have geographic limitations to new housing and a limited supply of skilled workers. On the demand side, intense competition from not just local buyers but also 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 115%. However, for the typical Hawaiian 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 income, years of housing supply not keeping up with job growth has kept prices high, forcing residents to double up with roommates (adding to competition for limited parking spaces), commute further away from jobs or even to leave the state altogether. The loss of an estimated 12,000 structures in the recent Los Angeles area fires will only exacerbate the high costs for both buyers and renters.

There are also a few overvalued MSAs in states including Washington and New York with payment-to-income ratios over 45%. Due to homes becoming increasingly unaffordable to the average buyers, the U.S. median payment ratio of 36.3% is also too high, suggesting that if mortgage rates don’t decline, some home asking prices 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 the natural beauty of the Hawaiian Islands has created tremendous demand from buyers from the U.S. mainland as well as from other countries.

Though the national median sales price of a home rose 4.2% year-over-year through November to about $430,000, in the Kahului MSA it soared nearly 45% to $1.2 million — or nearly three times higher. However, given Kahului’s high housing supply level of 10 months, these rising prices could soften in the coming months. Throughout the U.S., November supply was reported at just 3.1 months, which continues to favor sellers over buyers, assuming a balanced market ranges from four to six months.

Since taking office, Hawaii Gov. Josh Green has addressed the state’s housing crisis through five data-driven priorities:

— Expanding affordable housing inventory

— Maintaining existing affordable units

— Offering more housing support to local residents

— Coordinating and modernizing Hawaii’s housing development process

— Communicating the urgency of the housing crisis

To facilitate practical actions related to these priorities, the Hawaii Legislature has passed a series of bills 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 expediting the approval process for more affordable housing units by making it easier to seek exemptions from certain state laws and rules.

In addition, the bills would encourage 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, and funding a new task force to continue guiding long-range plans.

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 an income-to-rent ratio far above the national median of 32.0%.

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 (which includes the “Inland Empire” east of Los Angeles), San Diego and Los Angeles. In these markets, rent-to-per-capita-income ratios range from over 41% to nearly 68%:

— Kahului-Wailuku-Lahaina, Hawaii — 67.8%

— Riverside-San Bernardino-Ontario, California — 56.5%

— San Diego-Chula Vista-Carlsbad — 43.1%

— Urban Honolulu — 43.0%

— Los Angeles-Long Beach-Anaheim — 41.3%

The Most Overvalued MSA to Rent a Home

Besides being ranked as the most overvalued market to buy a home, the Kahului MSA is also the most overvalued region to rent a home because its rental rates have historically been rising faster than local incomes.

However, after reaching a peak of over $4,100 per month earlier in 2024, asking rents have since fallen by about 10% to $3,680. Year-over-year, Kahului rents have risen 4.7% versus a national increase of 3.4% to $1,983 per month.

In addition to the various housing bills signed into law promoting more housing development, Gov. Green approved another bill giving the state’s counties more authority in regulating short-term rentals. The increase in the number 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. For Maui County, new rules could mean gradually phasing out existing STRs in communities in which local residents cannot afford housing.

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. Whereas the difference between these ratios at the national level is just over 4.2%, for other MSAs it can reach over 35%, leaving the homeownership markets there open to mostly the wealthy 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 23% to nearly 48% higher than renting:

— Kahului-Wailuku-Lahaina, Hawaii — 47.6%

— San Francisco-Oakland-Berkeley — 41.7%

— San Jose-Sunnyvale-Santa Clara, California — 36.6%

— Los Angeles-Long Beach-Anaheim — 24.7%

— San Diego-Chula Vista-Carlsbad — 23.2%

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 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% down at the average monthly 30-year fixed rate reported by Freddie Mac.

Per capita income for each MSA was estimated through November 2024 using a proprietary formula incorporating the most recent annual Census Bureau data for July 2023 (and reported in December 2024), 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 overall U.S. for 2021 through 2023.

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The Most Overvalued U.S. Housing Markets originally appeared on usnews.com

Update 01/28/25: This story was published at an earlier date and has been updated with new information.

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