Undervalued Real Estate? These Cities Stand Out

The Bottom Line

Real estate prices continue to be 50+ above the pre-covid days, but the cost to build has also increased by a similar amount, and will continue to increase with inflation. In many cities, homes sell at below what it costs to rebuild them.

Our Top-50 metro analysis shows a clear split:

• Midwest & select Sunbelt markets trade at 10–50% discounts to replacement cost

• Coastal and high-growth markets trade at 20–100%+ premiums

This provides a guide for investors and first time home buyers waiting for prices to drop. If existing homes are selling at a significant discount, don't expect prices to drop. At the same time, investors can buy with confidence even if the property in mind does not have optimal cashflow in the first few years.

Houses can be up to 50% cheaper to buy than build.

Construction cost is increasingly becoming the anchor for housing prices, reinforcing the supply-side dynamics we discussed in our recent Loan Genie blog on inflation and supply shocks. Ongoing labor shortages, tariff-driven increases in building materials, and energy volatility (including oil-related shocks) are all pushing construction costs higher. This creates a rising replacement cost floor, meaning it becomes more expensive to add new supply. As a result, even when demand softens, home prices tend to hold up—because the cost to rebuild keeps moving higher.

This is why we built our model to analyze existing housing stock and replacement cost for the top 50 metros in the US.

Methodology (How We Built the Model)

We combined two core datasets:

1. Existing home prices (market)

• Redfin metro data

• metric: median sale price per sqft

2. Replacement cost (build cost)

• NAHB national construction cost baseline (~$162/sqft)

• Adjusted using:

  • RSMeans-style city cost indices

  • Small-lot land assumptions, to better represent starter homes and single family investment properties

    
    

Final formula

Replacement cost per sqft =(NAHB cost × city multiplier)+ small-lot land cost

Then compared:

Discount / Premium =Market price per sqft ÷ Replacement cost per sqft

The Results

Across the top 50 U.S. metros, the results show a clear divide: many Midwest and select Sunbelt markets trade at or below replacement cost, while coastal and high-growth cities command significant premiums. The deepest discounts often reflect weaker population growth, older housing stock, or renovation needs, while the highest premiums are driven by expensive land, regulatory constraints, and limited new supply. For investors, this highlights a key opportunity—focus on markets where prices are supported by replacement cost but not distorted by extreme scarcity, offering a better balance of downside protection and long-term upside.

Click on our interactive map to see the results for the top 50 metros in the US.

Why Some Markets Trade at Deep Discounts

The biggest discounts (20–50%) show up in:

• Pittsburgh

• Cleveland

• Memphis

• Detroit

• St. Louis

Why?

Population stagnation or decline

• weaker demand growth

• lower household formation

 Replacement cost reflects new construction, but for sale properties tend to be older housing stock. Many homes are:

• 50–100 years old

• functionally obsolete

• in need of renovation

👉 The sweet spot:

• Indianapolis

• Kansas City

• San Antonio

• Columbus

These offer:

• real discounts

• but still solid demand fundamentals

Why Some Markets Trade at Large Premiums

At the other extreme:

• San Jose

• San Francisco

• Los Angeles

• San Diego

• New York

• Seattle

These trade at 50–200% above replacement cost

Why?

Land is the real driver

• Replacement cost models underestimate land value in these markets.

• Land cost ≫ Construction cost

Regulatory barriers

• zoning restrictions

• permitting delays

• environmental rules

Scarcity pricing. Prices reflect:

• location

• income levels

• job concentration

But here’s the key insight:

👉 These markets are also:

• less landlord-friendly

• more regulated (rent control, tenant laws)

• lower yielding

High price ≠ good investment

Final Takeaway

Replacement cost is the closest thing real estate has to intrinsic value

In today’s market:

• Discount markets → cash flow + downside protection

• Premium markets → scarcity + appreciation bets

👉 The best opportunities sit in between:

• where homes are below replacement cost

• but still supported by real demand