Reasoning Behind Metro Areas Housing Markets - What Makes Them Cheap or Steep?

ST. LOUIS ― Contrary to popular belief, when looking at a local housing market, it’s not simply whether average home prices are below or above the national average. William Emmons, assistant vice president, and chief economist of the St. Louis Fed's Center for Household Financial Stability, instead looked at long-term changes in average home prices and rents when compared to personal income levels in order to gauge a housing market’s attractiveness relative to other major metro areas.

The key takeaways for this quarter’s Housing Market Perspectives are:

• Changes in the ratios of average home prices and rents to personal income levels reveal large differences in relative housing values across major metro areas in the U.S.
• Housing markets in some major Upper Midwestern metro areas now offer the best values, on average, nationwide.

Emmons writes, “Many Upper Midwestern housing markets currently look relatively cheap, while many coastal markets appear expensive. As such, anyone seeking the most economical housing values today might take a closer look at metro areas between the two coasts.” In this report Emmons ranks metro areas best to worst in relative value for both owned homes and rentals.

While Emmons is clear that these measures are imperfect, he pointed out that changes in the ratios of average home prices and rents to personal income revealed large differences in  relative housing values in metro areas across the country, even after taking into account average local income levels and amenities.