Maplewood Commons now open!
Maplewood Commons now open!
During the earliest months of 2020, prior to pandemic-related lockdowns in the U.S., the housing market was continuing to gain strength on the back of a solid but slow-growing economy with low unemployment. In January of that year, thanks to a 30-year mortgage rate ranging from 3.6% to 3.7%, the median-priced home was more affordable than renting, fueling demand from renters eager to buy their first home.
With typical tenants paying 33% of their monthly per-capita income on rents and the average homeowner paying just 22% of their monthly per-capita income on mortgage payments, making the switch from renter to homeowner often made great financial sense.
However, by the end of 2022 as both mortgage rates and home prices continued to rise sharply, that payment ratio difference between owning and renting had flipped. While the share of monthly per-capita incomes paid by tenants to landlords rose just a few percentage points to 36%, for homeowners it jumped to 37%. Although rates for traditional 30-year fixed rate mortgages have recently trended downward from their highs of last fall, they are unlikely to fall enough in 2023 to match the high affordability levels of early 2020. As a consequence, the most affordable housing markets are likely to gain popularity in the months ahead.
Since these are national median figures, these same ratios will vary a bit between markets, with some homeowners paying up to 67% for principal and interest, and renters paying up to 58% in the most overvalued markets. At the other end of the spectrum in the most undervalued markets, homeowners are paying below 25% of median per-capita incomes for mortgage payments and below 27% for rent.
In these cases, if the general rule of thumb is to avoid paying more than 30% of a household’s gross income on housing, then a number of metropolitan statistical areas (MSAs) are undervalued based on local earnings, providing potential upside in equity gains and rents for both homeowners and investors.
While it makes sense to see former Rust Belt cities such as Detroit, Cleveland and St. Louis topping the list of the most undervalued markets in which to buy a home, in more recent years many of them have started to revitalize their economies with new ideas, companies and investments. For the Detroit MSA, the median payment-to-income ratio of 17.4% is less than half that of the 36.6% ratio for the overall U.S., which is continuing to boost interest from homeowners and investors currently living in other states and even other countries.
For renters, while Detroit is in the top 20 most undervalued markets, this ranking is led by the greater Omaha, Nebraska, area with a rent-to-income ratio of 22.3%, which is 38% less than the 35.8% ratio for the U.S. While St. Louis and Cleveland also join Detroit in being low-cost markets for renters, due to high incomes other markets such as San Jose, California, and Richmond, Virginia, are able to offer tenants a median rent-to-income ratio that is significantly lower than the national average.
Our data for these rankings are primarily sourced from the U.S. News Housing Market Index, an interactive platform providing a data-driven overview of the housing market nationwide. See the U.S. News Housing Market Index.
According to the Department of Housing and Urban Development, households should avoid spending more than 30% of their gross monthly incomes on a place to live, as that means less money left over for the rest of life’s necessities and emergencies. While that 30% rule may not apply to households with higher incomes and lower debt in areas such as Atlanta or Dallas, it’s still a useful formula to rank the country’s most undervalued housing markets.
For the purposes of this ranking, we chose November 2022, the most recent month for which we have comprehensive data from the U.S. News Housing Market Index. However, we encourage visitors investigating various housing markets to check with the online interface for updates at least once per month. See the methodology here.
If you’re in the market to purchase a home, the following five MSAs are the most undervalued, with a payment-to-income ratio below 24%. This ratio is well below the maximum rate recommended by HUD and significantly below the national average of nearly 37%:
The top 20 most undervalued housing markets include not just Midwest regions, but also cities near the East Coast and in Southern states such as Texas, Georgia and Florida. Still, while each of these markets report mortgage payment-to-income ratios under the national median of 36.6%, if that ratio gradually falls back to its pre-pandemic level of 22%, home prices in multiple markets could fall further in order to return to previous affordability levels.
The Detroit MSA has a mix of strengths including a low unemployment rate, few rental vacancies for investors and the country’s lowest payment-to-income ratio. However, those strengths are accompanied by a low ratio of building permits to household growth, subdued builder sentiment and a weak ratio of permits to job growth. Here’s a deeper look at the various data points regularly tracked by the Housing Market Interface for this MSA:
The overall Housing Market Index of 62.3 for the Detroit MSA fell 3.6% year-over-year through November, and is comprised of three subindexes on a 1-100 point scale, with 100 being the healthiest.
Learn more about these subindexes and the data points they track.
The median price in the Detroit MSA fell by 2.8% over the past year to $175,000, which is the lowest among the MSAs currently tracked by the Housing Market Index. Although housing supply has been trending up to 3.2 months at then-current sales rates, that level of supply is about half of what is generally considered a balanced housing market
As of November, the rates of mortgage delinquencies and foreclosure in the Detroit area nearly matched those at the national level, although these rates could rise in the event of a recession.
The U.S. News Housing Media Analysis tool interprets the sentiment from over 500 U.S. housing news articles each month. Filters allow you to tailor media results to your region, time period, source or keyword.
In the case of the Detroit MSA for the month of January, the most popular keywords include "real estate pricing," "mortgage" and “price.” Other keywords of note include “renting,” “United States housing bubble” and “subprime mortgage crisis,” suggesting an interest in the possibility of home prices continuing to fall in this area.
In terms of place popularity keywords for January, “Detroit” is followed by "United States," "San Francisco,” “New York, “Seattle” and “Los Angeles."
Each month, there is an overwhelming amount of housing market news. Another U.S. News tool helps to understand and synthesize large volumes of housing-related media. This system then translates language into “sentiment” at the end of each business week.
This information is aggregated into a consolidated, interactive form that you can easily access and understand. Sentiment scores range from -1 to +1, with articles expressing the most negative sentiment earning a -1 and the articles expressing the most positive sentiment earning a +1.
The 1,605 articles shown through January that mention Detroit have an average sentiment of -0.02, which is more negative than the overall article average of -0.00, but sentiment is trending up.
If you’re among the growing number of potential buyers waiting to decide on the right time to jump into the housing market, you may live in an MSA with a rent-to-income ratio far below the national median of nearly 36%. In terms of undervalued rental housing markets, this list is led again by several markets in the Midwest in which this ratio is mostly close to or under 25%:
The Omaha MSA is ranked as most undervalued region to rent a home because its rental rates have stagnated as local incomes have risen. Still, it does retain some key market strengths, such as a low rent-to-income ratio, a relatively high rental vacancy rate and a positive ratio of building permits to employment growth. However, some of the weaknesses in Omaha include low builder sentiment, a subdued ratio of permits to household growth and low housing supply.
Here’s a deeper look at the various data points regularly tracked by the Housing Market Interface for this MSA:
The overall Housing Market Index of 61.0 for the Omaha MSA fell 6.5% year-over-year through November, with the subindexes ranging from 25.5 to 93.6 on a scale of 1-100:
By November 2022, even though the median observed rent price in the Omaha MSA rose 7% year-over-year to $1,236, it was still the lowest rent of the MSAs currently tracked by the Housing Market interface. By comparison, with the median sales price in the Omaha region rising 12.2% year-over-year to $275,000, in November that would have translated to a monthly mortgage payment of $1,435 (or 16% higher), making renting in this part of Nebraska a comparative bargain.
For those potential homebuyers looking for the best time to enter the housing market, another metric to study is the difference between the cost of owning versus renting in a particular MSA. Where the difference between these ratios at the national level is about 1%, for other MSAs it can reach over 30%, leaving the homeownership markets there open to mostly the wealthy. But in the case of the most undervalued markets, the cost to own can be 5% to 10% less than renting.
The following five MSAs are markets in which the cost to own is nearly 5% to over 10% lower than renting:
The U.S. News Housing Market Index is the most comprehensive collection of data points for the country’s largest MSAs also easily available for free on the Internet. This data is sourced from a variety of government and private sources, and is referenced by clicking the i button next to an interface heading.
The overall index includes four subindexes:
The Demand HMI includes government data on employment, unemployment, household growth, consumer sentiment from the University of Michigan, median home sales prices from Redfin, and observed, smoothed housing rental prices from Zillow.
The Supply HMI includes government data on housing supply, rental vacancy rates, construction costs, construction jobs, builder sentiment from the National Association of Home Builders and architectural billings from the American Institute of Architects.
The Financial HMI includes government data on interest rates and access to credit, delinquencies and foreclosures from Black Knight, and ratios of monthly mortgage and rental payments to per-capita incomes calculated by the index. Monthly mortgage payments assume conventional financing with 20% down at the average monthly 30-year fixed rate reported by FreddieMac.
Per-capita income for each MSA was estimated for November 2022 using a proprietary formula incorporating the most recent annual Census Bureau data for July 2021 (and reported in December 2022), monthly national personal income growth from the Bureau of Economic Analysis, and a calculation of each MSA’s relative income growth performance versus the U.S. for the pre-pandemic years of 2016-2019. Those years were chosen to avoid the impacts of the federal government stimulus packages bestowed in 2020 and 2021, which would skew the results for each MSA.
Source: U.S. News & World Report. "The Most Undervalued Housing Markets in the U.S." by Patrick S. Duffy.
