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Housing prices have risen rapidly in the past year, even as mortgage rates are on the rise with pros saying they will likely go up more (see the lowest mortgage rates you can qualify for here). But some markets are now a lot more overvalued than others, according to researchers Ken H. Johnson, associate dean of graduate programs at Florida Atlantic University, Eli Beracha, director and professor at the Tibor, and Sheila Hollo School of Real Estate at Florida International University.
They developed a methodology, using Zillow data, to score the top 100 most overpriced and underpriced metropolitan cities in the United States. “For the 100 markets, we use Zillow Home Value Index (ZHVI) monthly data to develop the long-term trend for home prices, and from there we estimate a market’s average expected price and compare this estimate to the actual ZHVI values — the premium is the percentage between the two numbers,” says Johnson.
The first thing to note is that all of the 100 largest metros sold at a premium, but for some that premium is extremely small. Indeed, their data shows that Baltimore is housing sold at the smallest premium, with buyers paying just about a 2% premium for real estate. That’s followed by picturesque Honolulu 2.11% and New York City 2.83%.
Least underpriced housing markets
So why is housing in these markets not selling at more of a premium? Johnson says this may harken back to the last housing downturn, when these were some of the hardest hit metros in terms of price declines. “These and other hard-hit markets such as Miami seem to have learned and resulted in more aggressive price negotiations by locals. Sort of, fool me once, shame on you, fool me twice, shame on me,” says Johnson.
Meanwhile, in some markets real estate is selling at a major premium, pros say. At the top, Boise City, Idaho ranks as the most overpriced metro, with a 75.18% premium. What makes that so? It may have something to do with people moving out of more densely populated areas into spots like Boise, which has steady population growth, as well as wage increases in the Mountain-West region and many outdoor amenities — all of which has made places like Boise a reliable bet for investors.
“For several months, Boise has been the most overpriced housing market in the US, making it the market most exposed to a turn down. Thus, it’s reasonable to expect rising mortgage rates would first slow prices and premiums in Boise,” says Johnson. The S&P CoreLogic Case-Shiller Home Price Index revealed that increased demand for second homes favored smaller towns, and in 2021, Boise saw real estate appreciate 22%, with the average homeowner equity increasing $64,000 from December 2020 to December 2021.
Most overpriced housing markets
|Salt Lake City||53.77%|
“Supply of and demand for housing units is the underlying driver of prices across all markets. While demand can change rapidly, the supply of housing units cannot change that quickly, thus, once a market’s relative position in the ranking is established, it’s difficult to change in a few months,” says Johnson. However, what may be more important than a market’s ranking is comparing performance in terms of premiums today with those of the past. “Lessons can be learned,” says Johnson.
Of course, this isn’t the only list of overvalued housing markets. CoreLogic looked at overvalued housing markets in March. Not only did the company reveal that home price growth in 2021 surged 15% from 2020, which is triple the average rate seen in the decade prior — it also found that plenty of markets are seemingly overvalued. Indeed, it called out Destin, Florida; Homosassa Springs, Florida; Prescott, Arizona; Lake Havasu City, Arizona; Punta Gorda, Florida; Naples, Florida; and Austin, Texas. CoreLogic’s Market Conditions Indicator tool uses a benchmark to indicate whether a metro’s home prices are high compared to local household incomes, and if they are, the market is considered overvalued.