Housing: Positive outlook for 2020.

AuthorKinghorn, Matt

The Indiana housing market remains locked in a standoff between strong buyer demand and scant supply. After years of growth in existing home sales and dwindling market inventory, however, the state seems to be bumping up against the limits of both measures (see Figure 1).

For instance, existing home sales in Indiana remain strong, yet the sales rate through the first three quarters of 2019 is slightly off the record pace set last year. Meanwhile, Indiana's so-called "months supply of inventory" measure in September 2019 was at an exceptionally low 3.6 months--just a tick lower than the 3.7 mark from the year prior (see Table 1).

All the while, these stubbornly tight market conditions are fueling an unprecedented surge in house price appreciation in the state. The Federal Housing Finance Agency's House Price Index indicates that Indiana house prices increased 6.4 percent year-over-year in the second quarter of 2019. This strong mark comes on the heels of annual gains of approximately 7 percent in both 2017 and 2018. Prior to these current market dynamics taking hold, the only time in the last 28 years that Indiana had an annual price gain above 6 percent was in the first quarter of 1994.

This sustained period of rapid price growth has pushed Indiana's "real" house prices (i.e., adjusted for inflation) to new highs in 2019 (see Figure 2 ). The early 2000s had long represented the peak period for house prices in the state. That changed in 2019 as real house prices in Indiana have eclipsed the previous record high set back in 2002. Given the current state of the market, Indiana can expect to see its real house prices continue to climb.

Short supply and rising prices would seem to suggest the need for more new construction. Indiana has seen a slight uptick in housing starts, with the number of new building permits up 1.7 percent year-over-year through the first three quarters of 2019. This increase was driven entirely by growth in multifamily construction, as permits for new single-family homes so far in 2019 is down nearly 3 percent year-over-year.

Even with a modest increase in total units in 2019, residential construction remains relatively low. This point is best demonstrated by comparing new construction to existing home sales. Between 1988 and 2005, there was a fairly consistent ratio of approximately two existing home sales for each single-family building permit in Indiana (see Figure 3). In 2019, however, that ratio will likely be...

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