Housing Market Cool-Off: The Great Migration and the Federal Reserve’s Impact

The US housing market has cooled off after experiencing a rise in prices over the past two years, but not all markets are experiencing the same trend. The pandemic caused a Great Migration of people moving to smaller cities with a lower cost of living, leading to a skyrocket in housing prices. However, the Federal Reserve’s aggressive interest rate hikes last year had a significant impact on the mortgage rates and cooled the housing market, as reported by AS on February 9, 2023.

Some metropolitan areas are now undervalued based on the cost of shelter compared to local median incomes, according to US News and World Report. The Department of Housing and Urban Development sets the level of affordability at 30% of gross income, which was exceeded by 36.6% in November 2022. The most undervalued markets were located in the Midwest, East Coast, and Texas, with Detroit being the most affordable with a ratio of 17.4%.

In terms of rental markets, all of the top 20 undervalued metro areas have a payment-to-income ratio below the 30% threshold set by HUD. The most undervalued rental market was Omaha, Nebraska with a ratio of 22.3%. The recent increase in mortgage rates has made renting more attractive in some markets than owning a home, with the national average for renters being 35.8% compared to 37% for homeowners.