Detroit has overtaken Atlanta as the nation's most overvalued housing market, researchers say, as affluent buyers push home prices higher in and around the Motor City.
Homebuyers in the Detroit metropolitan area are paying 40.79% more than they should, according to the latest report from professors at Florida Atlantic University and Florida International University. The report covers single-family houses, townhouses, condominiums and co-ops.
At the end of May, the average home price in Detroit was $254,325. But it should be only $180,642 based on publicly available price growth data dating back to 1996, according to professors Ken Johnson of FAU and Eli Beracha of FIU. Atlanta is the second most overvalued market with a premium of 40.37%.
Even with interest rates near 7%, home prices are still rising across most of the country, fueled by a shortage of existing properties for sale and homebuilders offering mortgage rate “buydowns” to make monthly payments more affordable for buyers, analysts have said. But consumers buying near the peak in overvalued markets run the risk of having to stay in the properties longer if the market corrects and prices level off or decline, they said.
Predominantly, wealthy buyers are snapping up Detroit homes, and that's a concern because the greater metropolitan area doesn't appear ready to support higher values in the long term, Johnson said in an interview.
Despite a renaissance in downtown Detroit in recent years, the city and surrounding areas are still dealing with income inequality and meager population growth, noted Johnson, citing salary and demographic figures from the U.S. Census Bureau and StatsAmerica at Indiana University’s Kelley School of Business.
“Well-to-do people are bidding up home prices in and around Detroit,” he said. “They’ve got to grow the population and the economic base. Real estate markets like good income, but they like everybody making good income.”
Florida continues to dominate with the highest number of locations on the list of the most overvalued housing markets, with Cape Coral, Palm Bay, Tampa, Orlando and Lakeland all in the Top 10. But those markets appear to be settling as premiums move back closer to their long-term trends, according to Johnson and Beracha.
While prices in those Florida markets are leveling off, No. 11 Miami's premium continues to rise, hitting 33.74% at the end of May. The city's annual average appreciation rate in the past year has been 7.12%, well above the historical average of 4.26%, according to Johnson.
"That's disturbing," he said. "That should not be happening in the presence of 7% interest rates."
The rankings don’t factor in how expensive a market historically has been.
High-cost metropolitan areas such as San Francisco and Washington, D.C., for example, are among the five least-overvalued markets because homes in those areas are priced relatively close to where they should be, based on the historical trends, the professors found.