Housing: Positive outlook for resilient Indiana market.

• Author: Kinghorn, Matt

So far in 2020, no obstacle has proven too daunting for motivated homebuyers. Faced with a global pandemic, economic disruption, surging house prices and sparse market inventory, Indiana is nonetheless on pace for a record number of existing home sales this year. Even new single-family construction is set for its strongest year since 2007--although residential construction remains well below pre-Great Recession levels.

This uptick in construction is being driven by the unsustainably tight market for existing homes in Indiana that has led to an unprecedented rise in prices. The average of 11,400 existing homes on the market in September 2020 translates to a scant 1.5 months supply of inventory (i.e., a measure of how long it would take to exhaust the existing stock of homes on the market at the current sales rate). By comparison, the U.S. currently has an estimated 2.7 months supply (see Table 1). Six months of supply is the traditional benchmark for a balanced market.

Amid this extreme sellers' market, existing house prices in Indiana were up 7.5% year-over-year in the second quarter of 2020. This ranks as the sixth-fastest rate of growth nationally, and it is the 10th consecutive quarter that the state has seen at least a 7% annual gain. For Indiana, this represents a pace of growth over a sustained stretch that is unmatched in the last three decades (see Figure 1).

The key question is whether household incomes in Indiana can keep up with these price gains. Over the last 30 years, the ratio of median sales prices to median household incomes in Indiana has held remarkably steady--even during the bubble years and subsequent crash. Fortunately, with an average annual growth of 6.8% between 2014 and 2019, changes in the state's median household income have kept pace with the stronger rate of house price appreciation in recent years (see Figure 2).

Short supply and rising prices would suggest the need for more new construction. Indiana has seen a relatively strong increase in housing starts, with the number of new building permits up roughly 5% year-over-year through the first three quarters of 2020. This increase has been spurred by construction for single-family units, which has improved by 10% over the same period.

Even with this boost in residential construction, new home building remains relatively low by historic standards. This point is best demonstrated by comparing new construction to existing home sales. Between 1988 and 2005, there...