What's the flip side of Indiana's low-cost housing?

• Author: Barkey, Patrick M.
• Position: Indiana Indicators

MENTION TO ANYONE the fact that Indiana businesses pay, on average, lower wages than those in many other states, and you will inevitably be told that the cost of living is lower here, as well. The implication is that workers in Michigan and Illinois, who earn 10 to 15 percent more than the average Indiana worker, are really no better off than we are.

As reasonable as this may sound, it's not quite that simple. For one thing, the prices of many things that we buy--from gasoline to airline tickets to college education--don't depend much on where you live.

Cost-of-living differences are common across the country, of course. The 2002 median home price of almost $112,000 for Indianapolis pales in comparison to the $482,000 price for homes in San Francisco, the $358,000 buyers shell out for homes in Boston, or even the $198,000 price tag for homes in Chicago.

In fact housing costs are the biggest wild card in swinging the overall costs of living in any given city in either direction. According to ACCRA, a Virginia-based organization that tracks such things, not only do housing costs consume the largest share of the typical urban household's budget, differences in those costs from city to city can be as large as 100 percent.

But those costs, by themselves, don't necessarily translate into changes in our economic well-being. This is partly because consumers can soften the effect of higher housing prices by buying less house. And once those families squeeze themselves into their high-priced domiciles, they will discover a remarkable thing. That same house that cost such a pretty penny when they bought it will add hundreds of thousands of dollars to their wealth when they sell.

This is the flip side of low costs of living states like Indiana, which is scarcely mentioned in comparisons like those conducted by ACCRA. The reason why housing costs are so low here is that rates of appreciation are also low.

Between 2001 and 2002, median home prices rose by a scant 0.8 percent in Indianapolis, according to the National Association of Realtors. Compare that to the 7.8 percent rise in prices over the same period in suburban Chicago, or the 14.7 percent appreciation in home values in Minneapolis/St. Paul. Those rates ate highly volatile, of course, but the general pattern is not. Hoosiers pay the real cost, if you will, of their affordable housing when they sell.

If you doubt it, then do the math. Put two identically paid executives in, say, Fort Wayne...