Michael Hicks is the George and Frances Ball Distinguished Professor of Economics and the director of the Center for Business and Economic Research at Ball State University. His column appears in Indiana newspapers.
Many readers will be unfamiliar with Indiana’s housing glut, which the U.S. Census reports are more than 300,000 excess homes. This is partly because few community leaders and even fewer Realtors wish to talk about this chronic problem. I’ll explain by beginning with a Muncie example that is applicable to much of the state.
Shortly after my recent article on the urgent need to preserve middle-class neighborhoods, a Realtor replied to my column. He took exception with my inference that there was an excess supply of homes in the greater Muncie region. Citing local real estate data listing of only 392 homes for sale in Delaware County, he argued that there was an acute housing shortage. He could not have been more wrong.
That same week the local paper listed the county sheriff’s sale of some 1,300 homes, a modest share of the annual listing of abandoned homes in the county. Worse still, the most recent Census data reported more than 5,100 vacant homes in Muncie alone, with more than 1,000 more across the rest of the county.
In any market, excess supply causes prices to drop, and Muncie is a prime example. Across three city council districts comprising 14,600 homes, the average tax assessment is less than $45,000 per home. My research with Professor Dagney Faulk indicates that homes priced in this range are over-assessed by 62 percent to 156 percent. That means when these homes do sell, they are changing hands at a fraction of their assessed value, or about the price of a decent used car. Now, as any realtor should know, these homes would all sell for $250,000 or more in Chicago. It isn’t the quality of the home; it’s the location of the home that matters.
Here in Delaware County, as in more than 60 other Indiana counties, the value of existing homes as estimated by the Federal Housing Finance Authority has fallen beneath the replacement costs. In Muncie, like much of Indiana, most homes are worth more disassembled and sitting on a truck than assembled in their current neighborhood. My Muncie home is a prime example. Built in 1990, I bought it in 2007 for about half the inflation-adjusted cost of construction. Since then, it has appreciated in price more slowly than the construction costs. Banks and builders are well aware of this, which is why new home construction has returned to pre-recession levels in only two Indiana counties.
The cause of this is clear. The Census reports that Muncie has lost close to one in six families since the early ‘70s and one out of every 50 families since 2010. This means thousands of excess homes that suppress prices across the county and beyond. The realtor who criticized my data on excess homes, or rather criticized the Census count of excess homes, claimed there was abundant demand for homes priced in the $250,000 range. That is unalloyed nonsense.
Every Realtor can tell stories of families visiting their community who are dissatisfied with the choices. I shouldn’t have to write this, but the presence of a buyer willing to pay $250,000 for a home that cost well more than $300,000 to build ain’t evidence of demand for new housing.
Across Indiana, families are relocating to places with better neighborhoods and better schools. This leaves too many houses and too few families in places with poor schools and weak public services. Jobs also flee these locations for reasons I will discuss in later columns.
Bad public policy can exacerbate this problem. Myopically, many communities simply try to subsidize new housing. Typically, this will only depress the value of existing homes, worsening the housing market recovery and stretching the problem into the distant future.
On rare occasions, new home construction is warranted, but that can never be the sole strategy. Communities need to more urgently stabilize middle-class neighborhoods, remove blight and improve the underlying conditions that influence household migration. This is not to suggest local government cannot better the situation. Improving local schools, repairing roads, controlling crime and providing public amenities remain the prime factors in fixing lagging housing markets. Moreover, these are the only real tools available to improve economic conditions over the coming decades.