Top Overvalued U.S. Housing Markets
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% to 3.7%
Back then, the typical homeowner was paying 22% of monthly per-capita income on mortgage payments, while the typical renter was paying 33% 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%, for homeowners the amounts paid on principal and interest soared to 37%. This was in large part due to mortgage rates jumping to over 7% before settling around the mid-6% 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% for principal and interest alone, and renters paying up to 58%. Consequently, if the oft-repeated rule of thumb is to avoid paying more than 30% 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.
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. See the U.S. News Housing Market Index.
According to the Department of Housing and Urban Development, households spending more than 30% 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% 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.
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%, that’s still 10 percentage points over the recommended maximum. Notably, even the U.S. median payment ratio of 36.6% is too high, suggesting that home prices have further to fall before the market can recover.
The Most Overvalued MSA to Buy a Home
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: