Study: Homebuyers Facing Overvalued Markets Despite Prices Moderating

Housing prices are starting to stabilize across the country, though homebuyers waiting for a break in the market may not find it anytime soon, according to researchers at Florida Atlantic University and Florida International University.

Price increases have lessened month-to-month in areas like Seattle, where prices only increased about .2 percent, Charlotte, North Carolina, .3 percent, and only .4 percent in Portland, Oregon. Jacksonville and Phoenix saw slight price declines of .03 percent.

“Prices are still moderating in the majority of the country, especially east of the Mississippi,” noted Ken H. Johnson, Ph.D., real estate economist at FAU’s College of Business. “There’s not much price movement. But, once you go west, you see some price declines.”

Despite the beginning stages of a moderation in housing prices, markets throughout the country remain significantly overvalued compared to their long-term pricing trends.

It’s a sign that it could be years before prices return to where they should be, and buyers are no longer paying a premium for a home.

Atlanta remains the most overvalued market in the country, with buyers paying an almost 48 percent premium. Next highest is Detroit where homes are 45.88 percent overvalued; Tampa, 43.09 percent; Memphis, Tennessee, 42.65 percent; North Port, 42.59 percent; Cape Coral, 42.18 percent; and in Charlotte, North Carolina, 41.63 percent.

In Miami, an area that shows little signs of a decline, homes are 38.73 percent overvalued.

The full ranking can be found at the Beracha and Johnson Housing Market Ranking.

“There’s some concern in buying if you are looking to resell in a short time. But, if you are planning on staying in the home for several years, purchasing should perform as well in terms of wealth creation as renting and re-investing,” said Eli Beracha, Ph.D. of FIU’s Hollo School of Real Estate. “For example, in Miami, there’s no reason to suspect a crash in prices as witnessed 15 years ago when the average property lost upwards of 60 percent in its value. Supply and demand are completely different this time around.”

Each month, FAU and FIU rank the 100 most overvalued metro areas using publicly available data from online real estate portal Zillow or other providers. The data, which extends from January 1996 through the end of May, includes single-family homes, townhomes, condominiums and co-ops. 

The ranking is part of FAU’s Real Estate Initiative, a collaboration of professors at FAU, FIU, Florida Golf Coast University and University of Alabama to help the average consumer make informed decisions about housing. The initiative releases three monthly indices looking at rent prices, housing prices and whether market conditions favor buying or renting.

Some markets, like those on the East Coast and in Sun Belt states, are remaining overvalued because of their price-to-rent ratios. A higher return on rents indicate that prices will likely stay stable, while a lower return on rents suggests the opposite.

 For example, Miami offers homeowners a 7.45 percent return on gross monthly rents, while El Paso, Texas offers an 8.9 percent return and New Orleans an 8.33 percent return. The higher returns indicate that the prices in these markets will stay well supported.

“Higher returns from rent in the eastern half of the US help explain recent price performance differences between the western and eastern halves of the country,” Johnson said. “These high gross returns can be calculated from a metro’s price-to-rent ratio by simply inverting the ratio. In general, prices are probably going to be well supported in most of the Sun Belt states.”

-FAU-