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Study: Midwestern cities about average in housing market overvalue trend

(The Center Square) – Major Midwestern cities are hovering around the middle of the pack of overvalued housing markets, according to May data researchers at Florida Atlantic University and Florida International University presented.

Since 1996, FAU College of Business economist Ken Johnson and FIU Hollo School of Real Estate’s Eli Beracha have ranked monthly the most overvalued housing markets of the 100 largest metros in the United States by determining the premiums buyers pay for single-family homes, townhomes, condominiums and co-ops, a May 31 news release said. They use open source data from companies like Zillow. Larger premiums equate to more overpricing. Rankings do not consider historical trends so cities like New York and San Francisco are among the least overvalued in the U.S. because homes in those areas continue to sell around what the trends suggest home buyers should expect.

This month, they found that Detroit, Mich., which ranks 15th for overvalue among 100 top U.S. housing markets, is the highest-ranking Midwestern city, with a premium/discount of 51.16%, the study ranking shows. Michigan’s Grand Rapids ranked 24th with a premium discount of 43.35%. Other Midwestern cities were ranked as follows:

  • 65: Milwaukee, Wisc., 24.34%.
  • 71: Madison, Wisc., 21.12%.
  • 76: Minneapolis/St. Paul, Minn., 18.81%.
  • 77: Des Moines, Iowa, 18.38%.

On the other end of the spectrum lies Oklahoma City, Okla., with a premium/discount of 17.59%.

Four U.S. housing markets – Boise City, Idaho; Austin, Texas; Ogden, Utah; and Las Vegas, Nevada – are overvalued more than 60%. Baltimore, Md., has the least overvalue: 2.63%. Urban Honolulu and New York are the second and third, respectively.

In Boise, homes that should cost an average of $299,202 right now but buyers tend to be paying around $516,548, which is 72.64% above the long-term pricing trends, the researchers found.

“Near-record-low mortgage rates helped fuel demand for housing, especially during the pandemic, and the competition for homes pushed prices higher,” FAU College of Business economist Ken H. Johnson said in the release. “But now the Federal Reserve is raising rates to curtail inflation, and already that’s cooling demand.”

He said a slowdown could help people priced out of the market get homes, but it could also hurt some consumers.

“If we’re not at the peak of the current housing cycle, we’re awfully close,” he said. “Recent buyers in many of these cities may have to endure stagnant or falling home values while the market settles – and that’s not what they want to hear if they had planned to resell anytime soon.”

Beracha said shoddy underwriting and a glut of homes on the market, which prompted the housing crisis of 2006 to 2011, aren’t factors right now.

“In the prior downturn, many homes lost half of their values, but I don’t think we’ll see anything close to that this time around,” he said. “Still, it could be painful for many consumers who are buying near the top of the market.”

Beracha and Johnson said outcomes of the housing crisis will vary; growing population centers will suffer less from price declines but experience longer affordability issues while other metros will likely have bigger hits to home prices but fewer issues with housing affordability.

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