Indiana's positive housing market outlook for 2022.

• Author: Kinghorn, Matt

Indiana's housing market was swept into uncharted waters in 2021. Through a combination of scarce market inventory, strong buyer demand and rock-bottom mortgage rates, Indiana house prices rose by an unprecedented 17.5% year-over-year in the second quarter (see Table 1). Hoosier housing markets became so tight over the summer selling season that the state's so-called months supply of inventory measure fell below one month (six months of supply is considered the benchmark of a balanced market), and bidding wars became the norm as the state's average sale price for existing homes exceeded the list price.

As Figure 1 shows, Indiana's annual rate of house price appreciation for the second quarter of 2021 was more than twice as large as the previous high set just the year before, and more than three-times as large as any annual increase seen before this recent run-up in prices. Surging prices are not unique to Indiana, however. The state's rate of appreciation in the second quarter ranks only 20th nationally. The greatest spikes have occurred out west, with Idaho's house prices up 35% over this same period, followed by Utah and Arizona with each posting increases above 25%.

Of course, such price gains will push homeownership out of the reach of many Hoosiers, at least for the time being. According to the Federal Reserve Bank of Atlanta, "homeownership affordability" in the 11-county Indianapolis metro area declined by 13% between January and August of this year (see Figure 2). Among Indiana's other large metro areas, Fort Wayne, Evansville, South Bend, Lafayette and Elkhart also show double-digit declines over this period. According to this measure--where an index value of 100 or higher indicates that homeownership is affordable--housing remains affordable for a median-income household in each of Indiana's metro areas, although homeownership costs in Lafayette and Bloomington are approaching unaffordable.

In response to these dynamics in the existing home market, new single-family construction in Indiana is up nearly 24% year-over-year through the third quarter and is on pace to be the state's strongest year since 2006. This much-needed boost in construction has helped to narrow the sizable gap that has developed between existing home sales and housing starts since the mid-2000s.

Between 1988 and 2005, there was a consistent ratio of approximately two existing home sales for each single-family building permit in Indiana. Over the next 15 years...