These Are the Housing Markets Most at Risk for a Price Correction
A higher price-to-rent ratio favors renting over owning.
The Sunbelt states have undoubtedly benefited from an influx of migrating residents as well as businesses eager to take advantage of the region’s growth. Unfortunately, this activity means that its housing markets are most likely due for a price correction, according to new research from Florida Atlantic University and Florida International University that based its conclusions on the cities’ price-to-rent premiums in January that was taken from the Price-to-Rent Index developed by Florida Atlantic University’s Real Estate Initiative.
McAllen, Texas poses the greatest risk for a correction with the area’s price-to-rent premium of 22.72 percent. It’s followed by San Jose, California, 22.47 percent; Charlotte, North Carolina, 15.10 percent; Durham, North Carolina, 14.98 percent; Nashville, 13.83 percent; Atlanta, 13.24 percent; Raleigh, North Carolina, 13.17 percent; Orlando, 13.07 percent; Lakeland, Florida, 12.65 percent; and Dallas, 12.32 percent.
A higher price-to-rent ratio favors renting over owning, in general. Additionally, recent price-to-rent ratios for an area that are higher than the average local price-to-rent ratio poses particular risk suggesting that homeownership is becoming relatively more expensive than renting, paving the path for a possible pricing correction. All else equal, the greater the price-to-rent premium for an area, the greater the risk for correction. A premium is measured as the percentage difference between an area’s current price-to-rent ratio, and its average price-to-rent ratio.
“In the majority of the metros located in the Sunbelt states, housing prices have gotten more out of line with rents than in other parts of the country,” said Ken H. Johnson, real estate economist with FAU’s College of Business. “The price of homeownership is increasing faster than the cost of renting, causing home prices to get more out of line than rental prices, putting these areas most at risk for a pricing correction.”
The BHJ National Price-to-Rent Index, conducted by Johnson, along with fellow researchers Eli Beracha, of FIU’s Hollo School of Real Estate and William Hardin, dean of FIU’s College of Business, calculates the ratio between local home prices to annualized rents in 100 of the most populated metropolitan areas in the country. The greater the difference of the price-to-rent premium above the historic average, the more the market favors renting, while price-to-rent discounts (lower than average ratios) favor home ownership.
“Higher price-to-rent premiums for these markets are mostly likely a reflection of families from the Midwest and Northeast moving into the Sunbelt and paying cash netted from the sale of their former properties. Regardless of cause at this point, home pricing has simply outstripped rents, placing downward pressure on prices in these metros,” Beracha said.
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