If you’re searching for a good deal on a home, the Midwest could be a good place to look.
California, on the other hand, is the epicenter of overvalued housing markets. But it’s certainly not alone.
That’s according to data from First American Financial Corp., which found the housing markets in several major metro areas are overvalued compared to the actual buying power of local residents.
The analysis took income levels, home prices and interest rates into account to determine whether markets were overvalued or undervalued.
Home prices have soared nationally over the past decade — especially during the pandemic — and that’s driving a significant affordability crisis in many regions. High interest rates and a sustained lack of inventory aren’t helping matters.
The dynamic is leading some cities to rethink their zoning laws or search for other solutions to make housing more affordable.
The most overvalued housing markets
As of March, homes in several California communities were among the nation’s most overvalued compared to local buying power.
In Los Angeles, buying power was a mere $413,108 compared to the median existing home price of $923,750 — meaning homes were valued at 124% above buying power.
San Jose (98%) wasn’t far behind. Even with tech layoffs and migration trends, housing affordability in Silicon Valley and the San Francisco Bay Area remains a significant challenge.
Buying power in San Jose was $722,849, while home prices were almost double, at $1.43 million.
San Diego’s median price was 80% higher than what its residents could afford, while San Francisco’s was 76%.
Sky-high home prices in California, among other factors, have prompted many to leave the state.
Midwest may have room to grow
Conversely, buying power data suggests several cities across the Rust Belt have significant opportunity for property to appreciate.
Some also rank among the strongest markets for first-time homebuyers.
In Detroit, median home prices were $216,126. That’s 44% below the local buying power of $388,258. After a period of challenges, the Motor City more recently has become a poster child for revitalization amid a frenzy of new development.
Meanwhile, homes in Cleveland were selling near $182,500, while residents could typically afford $310,572 — meaning homes were 41% less than local buying power. In Pittsburgh, the median home price of $188,100 was 39% below the buying power of $310,802.
Economists say housing prices continue to pinch many buyers — and interest rates aren’t helping matters.
Researchers at Redfin Corp. noted earlier this year that homeowners are staying in their homes twice as long as they did back in 2006, when the median homeowner spent 6.5 years in one place.
That figure reached 13.4 years in 2020 but has since dipped to 11.9 years as of 2023.
“Americans who already own homes benefit from rising values and can consider themselves lucky they broke into the housing market while they could still afford it,” said Elijah de la Campa, senior economist at Redfin, in a statement. “On the other hand, price appreciation makes the prospect of buying a new home daunting or even impossible for many people who want to move.”