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Housing Market 'Crash' Concerns Raised for One City
Detroit's homes are overvalued, helped by people in the area moving to new properties and contributing to an increased demand, according to new research.
Read more:How to Calculate How Much House You Can Afford
Home prices in the city may crash before they return to their normal trend, the researchers from Florida Atlantic University and Florida International University said. Houses in the Detroit metro area were nearly 41 percent overvalued compared to their typical prices, leading all the markets they examined.
"Detroit's rise as the most overvalued housing market in the country is likely due to new household formation," Ken H. Johnson, a real estate economist at Florida Atlantic University's College of Business, said in a statement. "While population growth is relatively stagnant in the area, people are starting to leave their current households to form new ones, placing pressure on a housing market that simply does not have enough units to support this new demand."
Read more:First-Time Homebuyer Guide
Johnson said that prices may return to normal levels, but it's a question of how.
"Eventually, prices will return to their long-term trends, but how they get there is the open question – will prices crash as they did after the last housing cycle's peak or will home prices flatten out and slowly work their way back to the area's trend. It will be one of the two," Johnson said in the statement.
The researchers used data from the real estate platform Zillow to analyze housing prices. They examined "the difference in actual average selling price in a city and the city's statistically modeled average selling price to calculate a premium or a discount."
The results showed that of the 100 cities under examination, 98 were selling properties at a premium, while Honolulu, Hawaii, and New Orleans, Louisiana, were going for a discount.
Zillow's data showed that the value of a home in Detroit has risen sharply over the last five years. As of May, typical home values were at $72,500. Five years ago, in June 2019, a home's value in Detroit was about $47,000. Meanwhile, the median sale price for a home in the city stood at about $75,000 as of the end of April, and the median list price was nearly $91,000.
Read more:Tips to Help Sell Your Home for the Highest Price
The researchers suggested that, at some point, prices will restabilize.
"Housing prices can and will re-stabilize. The only question is how local home prices will return to a given area's long-term pricing trend," Eli Beracha, director of Florida International University's Hollo School of Real Estate, said in the statement. "Will it be quickly with a precipitous fall in home prices extinguishing all worries of affordability? Or will prices flatten and slowly return to the area's long-term trend sustaining equity values but creating considerable affordability problems?"
Newsweekreached out to Johnson and Beracha for comment via email on Wednesday.
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- https://www.msn.com/en-us/money/realestate/housing-market-crash-concerns-raised-for-one-city/ar-BB1pmpW8?ocid=00000000
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