MUNCIE, Indiana — Indiana is grappling with a housing problem. Mayors across the state are struggling with ways to have new homes built in their communities. Last year, the Indiana Legislature convened a task force that heard several groups present their perspectives. One result is that in this session of the General Assembly there are bills to subsidize developers to build new housing.
I understand your concerns. About a third of the country’s workers can now work from home, and the availability of housing will matter to the millions of families who can now live wherever they choose. For this reason, it is necessary for policy makers to understand the full dimensions of the problem. In many cases, doing the wrong thing is worse than doing nothing.
There are essentially two distinct housing issues in Indiana. One is humble but familiar. In fast-growing places there are too few apartments that are affordable for low-income families or young workers. So if you are a new school teacher in parts of the fast-growing Indy suburbs, it will be difficult to live in the community you serve. This is a known issue because it is so common in the United States. However, Indiana has few fast-growing cities; Therefore, in terms of total numbers, the problem is modest.
The second problem is the prevailing belief that Indiana has a widespread housing shortage. Upon closer inspection, the data tells a very, very different story. In fact, the state has a housing glut. In all but a half-dozen or so counties, we are overserved households. This is true whether you are looking at census housing data or Multiple Listing Service housing data.
The MLS data is often used to argue that Indiana housing is underserved. Among the most frequently cited statistics are housing stock data. There were 9,800 homes for sale in Indiana in January. In the past year, our population has grown by less than 20,000 people. Even at its narrowest point, our monthly housing stock never fell below 25 percent of annual population growth.
The census data tells an even clearer story about the housing stock. Since 2010, a new single-family home has been added for every 1.5 new residents in Indiana. However, the average household size in our state is 2.5 people.
In addition, the official 2010 census counted nearly 300,000 vacant homes nationwide. This includes only habitable buildings, not dilapidated or uninhabitable houses. This housing oversupply, 1 in 10, would easily handle all of our population growth since 2000.
The price data tells the same story. So far this century, Indiana home prices have risen 72 percent of the national average; Home prices in our hottest metro area have risen just 75 percent faster than nationwide. This relatively sluggish price growth indicates a housing surplus, not a shortage. None of this should come as a surprise.
As with much of the Midwest, about a third of Indiana’s counties have been declining in population over the past 50 years. People go, but houses stay. So, in most cities across Indiana, there are hundreds or thousands of vacant homes. Vacant houses depress housing values in the entire region in which they are located. The effect is at least strong enough to reach the county boundaries, but probably beyond. Here’s why.
Homes in an area with declining population will lose value. As soon as the market price falls below the cost of new housing, prices collapse and housing construction is largely stopped. This is not my observation or opinion – these issues have been studied for more than a century, with a focus on the Rust Belt for 50 years. A modest amount of research would uncover this work, which would help avoid potentially damaging policy mistakes.
For example, the Legislative Task Force mentioned ways to close the “valuation gap” on new housing. But what if the “valuation gap” is simply that the financial markets are working properly? You see, lenders go to great lengths to ensure that the loans they make can be repaid, and if a default occurs, they can recover assets to bail out their depositors. Banks want to make loans, but not bad ones.
If a home is appraised at a price too low to sell, bankers will refuse credit to purchase that home. Not only is this a signal that the home is overpriced, it is also a signal for builders to build new homes elsewhere. It’s almost like nobody remembers the real estate bubble. Well-functioning housing markets may certainly disappoint many. Complaining about them, however, is like complaining that no NBA team will pay me as much as LeBron James.
There may be good arguments for subsidizing development, but those arguments are very specific to a particular downtown or urban area. They also recognize the fact that housing markets are extremely efficient. Subsidizing builders carries the real risk of too many homes being built in the wrong places. But wasting a few tens of millions of tax dollars isn’t the real risk of misidentifying problems in the housing market — the real risk is ignoring the fundamentals of housing demand.
New, attractive homes don’t create a growing community; The causality works in the other direction. Growing communities lead to new housing. In growing communities, older homes are being renovated because it makes financial sense. This dynamic is also attracting home builders, but not to shrinking places. The housing supply corresponds to the housing demand and not vice versa. If excess housing supply prompted people to move to that community, people would flock to Muncie and Detroit and Toledo while fleeing Carmel and Columbus. That doesn’t seem to have happened in the last half century.
Migration and housing demand is driven by quality schools, low crime, clean air, decent parks and other public amenities. For example, no one should be shocked to learn that school quality alone accounts for a third of the price difference between identical houses in different locations. Building new homes will not fix schools, crime, or pollution. They are simply a bandage to cover up bad foundations. Adding more homes to an already oversupplied market will only decrease the value of existing homes. It fixes the wrong problem and diverts resources from the fundamental issues driving household migration.
Michael J. Hicks, PhD, is Director of the Center for Business and Economic Research and the George and Frances Ball Distinguished Professor of Economics at Ball State University’s Miller College of Business.
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