Which are the most overvalued US metros?

Detroit has now become the most overvalued housing market in the United States, surpassing Atlanta, according to research from Florida Atlantic University (FAU) and Florida International University (FIU).

Homes in the Detroit metropolitan area are currently priced 40.79% above their historical averages, based on data from the end of May. Atlanta followed closely behind, being 40.37% overvalued.

Ken Johnson, real estate economist in FAU’s College of Business, attributed Detroit’s rise to new household formation.

“While population growth is relatively stagnant in the area, people are starting to leave their current households to form new ones, placing pressure on a housing market that simply does not have enough units to support this new demand,” Johnson said.

The research, which examines the 100 most populated metro areas in the US, uses publicly available data from Zillow to calculate how overvalued or undervalued typical homes are in each market.

Currently, 98 of the 100 cities studied are selling at a premium, with only Honolulu and New Orleans transacting at a discount.

Johnson noted that continued rent growth in Detroit signals that home prices are likely to keep rising in the near future. However, he cautioned that Detroit lacks the sustained demand from newcomers and population growth seen in markets like South Florida and other parts of the Sun Belt.

“Eventually, prices will return to their long-term trends, but how they get there is the open question – will prices crash as they did after the last housing cycle’s peak or will home prices flatten out and slowly work their way back to the area’s trend. It will be one of the two,” Jackson said.

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Some previously overpriced markets have begun to stabilize. Austin, Texas, for example, is currently 11.72% overvalued, down significantly from its peak of 46.70% in June 2022.

Eli Beracha, director of FIU’s Hollo School of Real Estate and co-researcher on the study, pointed out the uncertainty in how local markets will adjust.

“Will it be quickly with a steep fall in home prices extinguishing all worries of affordability? Or will prices flatten and slowly return to the area’s long-term trend, sustaining equity values but creating considerable affordability problems?” Beracha questioned.

Both researchers stressed that ideal housing markets should remain close to long-term pricing trends with limited fluctuations.

“Unfortunately, the last two housing cycles have been typified by dramatic swings in prices above and below markets’ long-term pricing trend,” Beracha said. “As a result, we are continuously worried about either wealth loss from home price declines or prolonged periods of unaffordable housing.”

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