Top Place in the Country to Buy a House is Unthinkable

NEW YORK (MainStreet) — By almost any measure the Rust Belt is doing badly: the population's declining, people are earning less and Detroit became the largest city ever to file for bankruptcy protection.

But if you're thinking those are good reasons to stay away from real estate in the region, think again. Seven of the ten most undervalued housing markets are located in Michigan, Ohio, Illinois or Indiana, according to MainStreet analysis of 168 metropolises.

"We're seeing ridiculous pessimism" in the rust belt, comparable to the "ridiculous optimism" that drove the nationwide housing bubble before the last recession, said Dean Baker, co-director of the Center for Economic and Policy Research.

That "ridiculous pessimism" causes home prices to fall but doesn't have a similar impact on rents, which measure the real value of living in a city. When cities become less desirable places to live, people won't pay as much for housing, so rents drop; when they become more desirable, people spend more, so rent increases. Home prices should rise and fall too, unless fear of the future or speculative optimism distorts their value.

Nowhere has fear distorted home prices as much as in the Rust Belt. In Detroit, home prices fell 35% between 2001 and 2013, according to Zillow's Home Value Index. Over the same period, rental prices increased 29%, according to the Department of Housing and Urban Development's median three-bedroom dwelling rent estimate. The result was that rental prices rose a whopping 65 percentage points more than home prices over the period, making it the most undervalued market in the country.

The Motor City may be a shadow of its former self, but the rental prices indicate that it's not going to disappear altogether. The auto industry is again profitable and the city benefits from being within spitting distance of the University of Michigan. And that's not reflected in housing prices.