Source: US News —
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.
- The most undervalued markets to purchase a home are located predominantly in the Midwest and near the East Coast, led by Detroit, Cleveland, St. Louis and Philadelphia.
- The most undervalued markets to rent a home are located in the Midwest, led by Omaha, St. Louis, Cleveland and Kansas City.
- You’ll save the most buying versus renting a home in Detroit, Philadelphia, Cleveland and Chicago.
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.
Undervalued Homes for Sale
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%:
- Detroit: 17.4%
- Cleveland: 18.9%
- St. Louis: 21.7%
- Philadelphia: 22.3%
- Cincinnati: 23.6%
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.