Home Prices, Rents Still Significantly Overpriced, Study Finds

Home prices and rents are significantly overpriced in many U.S. metropolitan areas and towns, a new study by the Real Estate Initiative (REI) has found. The REI is a collaboration between Florida Atlantic University, Florida International University, Florida Gulf Coast University, and the University of Alabama.

Homes in Atlanta led the pack of 100 cities in the sample, selling at a premium of 49.55% above what the REI’s mathematical model predicted. Thus, as of February 28, 2023, a home in Atlanta that the model predicted should have sold for $238,541 would have sold for $356, 748 according to actual data from Zillow’s Housing Value Index. Zillow defines the Index as “A measure of the typical home value and market changes across a given region and housing type. It reflects the typical value for homes in the 35th to 65th percentile range.”

Other cities with home premiums over 40% include five in Florida (Coral Gables, Lakeland, Palm Bay, Deltona, and Tampa), two in Tennessee (Nashville and Memphis), Charlotte, NC, and Detroit, MI.

A separate study of rents conducted by the REI showed a similar pattern of rents set at levels higher than the model would have predicted. The model is based on the Waller, Weeks and Johnson Rental Index that shows where rents should be, based on a history of rents. 

Comparing this data with Zillow’s Observed Rental Index of actual current rents, REI found that nationally, average rent should have been $1,873 a month but was in fact $1,975 – 6.31 percent above the previous year — giving landlords a premium of 5.48 percent. The highest rental premium among the 100 cities followed was set by Cape Coral, FL, where a predicted average rent of $1,976 ballooned 13.59% from the prior year to $2,283 yielding a premium of 15.51% — even after falling .08% from the month before. Other cities with high premiums included Miami, North Point, FL, Charleston, Springfield, MA, Tampa, and Akron, OH.

Even so, a separate price-to-rent report by REI suggests that in many markets it makes more sense to rent than to buy. Ken H. Johnson tells GlobeSt.com he is especially concerned that people out west are paying too much for homes compared to rent. Johnson is a professor and economist in Florida Atlantic University’s college of business who helped develop the Beracha, Hardin and Johnson national price-to-rent ratio and other model indexes used by REI. 

While population growth and high interest rates contribute to rising home prices and rents, Johnson says the number 1 contributor is that the supply of housing is inadequate. 

“We have not built enough units to catch the expanding population. We need more developers and builders,” he says. “This time around, the crisis will be extended. I don’t expect rents to go down and prices are not going to drop rapidly. We are facing a long-term affordable housing crisis.”