Detroit is the nation's most overvalued housing market, while prices in metropolitan areas across Florida are slowly moving closer to their historical norms, according to a new report.
Homebuyers in the Motor City metropolitan area are paying 37% more than they should based on past pricing history, according to professors Ken Johnson at the University of Mississippi and Eli Beracha at Florida International University. The average price for a home in Detroit is $247,744 but it should only be $180,798.
Johnson and Beracha rank the 100 largest U.S. metropolitan areas using publicly available data that covers from January 1996 through the end of December. The report includes single-family homes, townhouses, condominiums and co-ops.
Las Vegas is the second-most overvalued market, with buyers there paying a 35% premium, while Atlanta is third at 33.1%, according to the researchers.
Consumers who buy homes now in overvalued markets are paying near peak prices and risk being stuck with the properties for a significant amount of time before they can resell at an acceptable profit, the researchers say.
Still, the average price of a home in Detroit can be far lower than other regions, and that is driving some interest. And home sale prices there are rising for other reasons as well, Ashley Walker, an independent real estate agent in the Motor City, said in an interview.
First, some Detroiters bought investment properties 15 years ago when prices and mortgage rates were lower and have used the homes as residual income generators. Many of those same landlords have now decided to gut, renovate and sell those homes. Once the work was done on the house, those landlords "increased the price because they want back the amount of money they've put into it," Walker said.
Another reason: many Detroiters became irritated at the growing price of rentals and noticed that they could pay a mortgage for roughly the same, or even lower, price of an apartment. That realization pushed many middle-class Detroiters down the path of homeownership at the same time, thus driving up demand for homes in the area during the past four years.
"People were literally buying houses for $10,000 or $20,000 over the asking price because there were so many people in line who wanted that same house as well," Walker said.
A downtown Detroit renaissance has encouraged investment in the area in recent years, and people who previously lost homes in foreclosure are back in the market finding value, according to Carl Williams, president of the Detroit Association of Realtors.
That demand is leading to a run-up in prices as the city continues to recover from economic hardships over the past decade, he said.
"Detroit is becoming a destination city again," Williams said in an interview.
Detroit's top ranking is surprising, given that the city and its surrounding areas are gaining very little, if any, in population, according to researcher Johnson.
"When there is no growth in population, home prices should be falling," Johnson said in an interview.
Affordable areas overheating
Other markets on the top 10 most overvalued markets list are Knoxville, Tennessee; Worcester, Massachusetts; and New Haven, Connecticut. These were once-affordable areas, but they're now starting to overheat.
Meanwhile, major markets in Florida that once dominated the top 10 have fallen down the rankings, suggesting that Florida appears to be close to the peak of the market, Johnson said.
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In terms of affordability, New Orleans is an attractive market because it's offering discounts to buyers based on past pricing trends, according to the researchers. New Orleans homes are trading for 8.2% less than they should.
"This score suggests that the metro might be the country’s best buy at present," Beracha said in a statement. "However, lagging population growth could be the proximate cause of the present score."
Urban Honolulu, Hawaii, was the one other market offering a discount, with homes there valued 6% below the historical trend.
The rankings don’t consider how expensive a market has been traditionally. High-cost areas such as San Francisco and New York are among the nation's least overvalued because homes in those metropolitan areas are selling relatively close to where they should be, based on their pricing histories, according to the researchers.
Eventually, wage increases will outpace home price gains, and that's the key to making housing more affordable, according to Johnson and Beracha.