The U.S. real estate market appears indestructible, with home prices nationwide continuing to increase. The latest report from analytics company CoreLogic shows impressive growth of 5.2% year over year in November 2023.
It’s not an anomaly, either—home prices grew 4.7% year over year in October 2023. CoreLogic’s projection is a steady home price growth throughout 2024, forecasting a 2.5% year-over-year increase in November 2024 compared to November 2023.
We know that the biggest issue facing the real estate market right now is affordability. And it’s actually decreasing. According to Redfin, it hit rock bottom in 2023, with just 16% of all homes for sale in the U.S. affordable for the typical buyer. So, why, despite this seemingly dire situation, are prices still going up?
Why Do Prices Keep Rising?
There is a tightly knit interdependence of several factors at play. The first is the by-now infamous spike in mortgage rates that has squeezed buyers’ budgets and made housing that was just about affordable completely unaffordable for many.
Even though mortgage rates began coming down in late 2023, from their peak of over 8% to just under 7% as of November, this isn’t enough to make homeownership affordable in areas that were already mostly unaffordable for the majority of their residents.
Dr. Selma Hepp, chief economist for CoreLogic, explained as part of the report that the result is that ‘‘in some metro areas, such as those in the Mountain West and the Northwest, higher interest rates are having a greater impact on homebuyers’ budgets, which is contributing to a larger seasonal slump.’’ The report shows that Idaho (-1.3%), Utah (-0.4%), and Washington, D.C. (-0.2%) all experienced annual house price decreases.
On the other hand, areas that can still offer buyers ‘‘relative affordability’’ while offering a reduced inventory recorded large home price gains. These were in the double digits in the Northeast markets of Rhode Island (11.6%), Connecticut (10.6%), and New Jersey (10.5%). ‘‘Markets where the prolonged inventory shortage has been exacerbated by the lack of new homes for sale recorded notable price gains over the course of 2023,” commented Hepp.
Basically, people in these areas can afford a home there because even with rising interest rates, local wages are high enough to cover the mortgages. As demand for these semi-affordable areas grows, so do home prices.
The Rise of Detroit
It’s a different story in cities. Some metro areas showed surprising home price surges inconsistent with the overall pace of growth in their surrounding areas.
Detroit, in particular, emerged as the surprise leader, recording the highest year-over-year home price growth among the metro areas examined in the report and beating Miami for the first time in 16 months. As Hepp explained to CNBC, Detroit, which saw appreciation of 8.7% as of November 2023, was playing ‘‘catch up’’ after lagging behind in home price growth during the pandemic. But there’s more to it than that.
Detroit is a metro area that’s become increasingly popular as an affordable destination for higher-tier housing. Having overcome its reputation as a city in decline, it’s become a city where people with a bigger budget go because their money will go a little bit further. Detroit has attractive housing stock in its historic neighborhoods that is expensive for the area but well-priced for what’s available.
Technically, Detroit is one of the overvalued metro markets surveyed in the report. This means that home prices in Detroit are high in comparison with local wages. It’s not unique in that regard—about 82% of the 397 metro areas examined in the report are also overvalued. “It really depends on who is buying in the area, and we’ve seen more higher-income folks buying in those areas,” Hepp told CNBC.
Apart from Detroit, other major cities that saw home price jumps were Miami (8.3%), San Diego (7.7%), and Chicago (6.5%).
Real estate investors investing in a city like Detroit really need to be picky about the properties they choose. The higher-income folks identified by CoreLogic want better-than-average properties, and they want value for money. So, while that issue of affordability hasn’t gone away, it just has that slightly different angle to it in a large metro area.
If you’re an urban investor, look for homes that aren’t just cheap. Instead, focus on homes with the potential to really stand out after a renovation.
On the other hand, if you’re investing outside a major city, the value-for-money factor really trumps everything else, so focus on offering buyers the best possible price first.
Florida May Be Heading for a Slump
Finally, if you’re wondering about housing markets to avoid, the CoreLogic report makes some fairly alarming forecasts about not one but four Florida markets. They are:
West Palm Beach-Boca Raton-Delray Beach
Deltona-Daytona Beach-Ormond Beach
All of these markets have a ‘‘very high’’ probability (over 70%) of a home price decline during the next 12 months.
Taking a quick look at the local data in these areas and comparing them makes it easy to see why they may be headed for home price declines. Let’s take the Palm Bay area. It has a median home price of $345,000, an average salary of $49,356, and an unemployment rate of 3.2%. On the other hand, Miami, which is experiencing a housing boom, has a median home price of $699,000, an average salary of $60,900, and an unemployment rate of 1.3% (decreasing steadily since June 2023).
Miami is one of the overvalued markets, as identified by the CoreLogic report. Its homes, on average, are worth more than the local population can afford. And yet, it’s easy to see how the technically more affordable area, like Palm Bay, is actually less attractive to buyers who may have more trouble finding employment in the area. Miami is sucking up both wealthier buyers who want a nice home in the warm city and in-state movers who want more and better-paying employment opportunities.
Real estate investors in Florida should take note of these trends. It doesn’t necessarily mean that you should only buy in Miami, but buying in at-risk areas will require a different approach—one that prioritizes local buyers’ capabilities.