Affordability concerns weigh on Indiana housing market outlook for 2023.

• Author: Kinghorn, Matt

Indiana's housing market experienced another dramatic twist in 2022, as rising mortgage rates slowed a two-year run of unprecedented house price gains and cooled off once white-hot buyer demand. Rising costs extended into rental markets with most of the state's larger metropolitan areas seeing double-digit rent increases over the last year. This helps explain the apartment construction boom currently underway in Indiana (see Table 1). However, there are no signs of any similar uptick in new single-family building to help alleviate the tight conditions that continue to influence the market for existing homes.

Homeowner affordability takes another hit

As Figure 1 highlights, Indiana's unsustainably high rate of house price appreciation finally began to decline in 2022, with the roughly 7% increase experienced in September the smallest year-over-year change since the early days of the pandemic. However, with 30-year mortgage rates doubling from 3.45% in January of this year to 6.90% in October, these slowing price gains offer little relief to prospective home buyers.

Figure 1: Indiana median sales price of existing homes, year-over-year change Jun 2020 4% 10% Sep 2020 Dec 2020 Mar 2021 9% Jun 2021 19% Sep 2021 Dec 2021 Mar 2022 18% Jun 2022 Sep 2022 10% 7% Source: Indiana Association of Realtors Note: Table made from bar graph. To illustrate how this recent surge in mortgage rates is bringing a chill to housing markets around the state, Figure 2 presents data from the Federal Reserve Bank of Atlanta that compares year-over-year changes in median sales prices for August 2022 to changes in the estimated monthly mortgage payment on the median-priced home over the same period.

In the 11-county Indianapolis metro area, for instance, the median sales price in August 2021 was $251,000, and with mortgage rates slightly below 3%, the monthly payment at this price level was an estimated $1,260. By August 2022, the median sales price increased 15% to $289,000, but with mortgage rates now up to nearly 6%, the monthly payment on the median-priced home was $1,850--a 47% increase year-over-year.

Figure 2: Median sales price and monthly mortgage payment on median price home, August 2022 year-over-year change Median price Monthly mortgage payment Indianapolis 15% 47% Ft. Wayne 12% 42% South Bend 15% 45% Evansville 9% 39% Lafayette 17% 49% Elkhart-Goshen 21% 52% Terre Haute 20% 50% Bloomington 15% 47% Note: This chart shows the year-over-year change for August...