Lessons in Home Prices

Housing prices may be the single best indicator of community vibrancy, so it is good to pay close attention to them. But that is not as easy as it appears.

The most readily available housing data – from Multi-Listing Services – only uses data on homes listed through Realtors. This MLS data reports a tiny fraction of housing stock, which is skewed towards newer, larger homes in more affluent communities.

Reliance on MLS data will typically overstate the value of homes within a community. At the same time, it will vastly understate the supply of available housing.

For example, in Muncie, the MLS listings for homes in September counted a paltry 185 housing units for sale. However, the U.S. Census Bureau reports more than 4,500 vacant, habitable homes in the city. So, MLS captures fewer than 1 in 20 homes in Muncie.

This pattern plays out across most of Indiana, sparing only newer, affluent communities. Statewide, Indiana had more than 290,000 habitable, vacant homes in 2023. This is a sharp contrast to claims to the legislature that Indiana has a deep housing shortage. In fact, Indiana’s dominant housing problem is a surplus of homes that are unlikely to ever again be occupied.

Using the wrong data has been, and continues to be, costly to Hoosier taxpayers. Relying upon MLS data, the state has embarked on subsidies for homes in smaller cities. That has led to additional growth in housing in places with surplus supplies.

For example, in Muncie, state and city taxpayers have subsidized several hundred new housing units during a period of population decline. The newly built, subsidized homes attract renters or buyers, but result in higher vacancy rates across the city. This further depresses prices for the existing housing stock and delays the date when Muncie will experience an actual housing recovery.

To put the problem in context, the inflation-adjusted value of the average home in Muncie is a whopping 54% lower than it was in 1980. The cause of this problem is simple. Through six decades of population decline, homebuilding continued – often with taxpayer support. Today, the city has far too many homes and far too few people.

Muncie finds itself in the same boat Detroit and Youngstown, Ohio, did when they commenced an ambitious downsizing of their housing stocks. But, instead of rebalancing the housing stock, Muncie and local institutions are building even more.

Economists have been warning about this problem in Rust Belt cities for decades. Governors, legislators and mayors have been ignoring them for decades. But the problem has become so widespread that it is difficult to imagine a policy fix that will take less than several decades to implement. Unless, of course, we had an extra $1.5 billion sitting around to reduce excess housing stock.

Muncie isn’t even the worst place in Indiana. There are a whopping 13 counties where inflation-adjusted home prices are lower than they were in 1980. Half are in eastern-central Indiana. The problem in all of these counties is the same. Housing stock is durable, so, as people leave, excess inventory accrues, depressing the prices for all homes.

Today in Muncie, and in much of Indiana, if you want to build a home that’ll sell for $150,000, construction will cost $175,000 to $200,000 or so. Naturally, builders will be hesitant to construct new homes in those communities. After all, home construction is a business, not a charity.

This lack of profit for new home construction has prompted builders and Realtors to push the state legislature for housing subsidies. The result has been overbuilding and a continued downward spiral of housing in many cities. It is discouraging to watch.

However, there is another reason to carefully watch home prices. They capture everything that is good, or bad, within a community. The best way to imagine this is to visualize two identical homes. If you put one down in a quiet, safe street with good schools, it would sell at a much higher price than one located in a high-crime district near and airport and served by poor schools.

Economists don’t have identical homes to move around neighborhoods, but we can create statistically identical homes by controlling for size, construction materials, year built, size of lot and number and type of rooms. With these models, which typically rely upon MLS listings because of their rich description of home characteristics, we can value different types of amenities.

Over the past few decades, economists have been able to place a dollar value on aspects of a community for which there is no price tag. We can tell you the effect of local crime rates on a home’s value. We can also measure the benefit of cooler summers or warmer winters, the value of a mountain or lake view, the impact of an EPA superfund site, the cost of airport or road noise, air particulate pollution, and the value of good schools, walkable neighborhoods and nice grocery stores.

Importantly, these valuations of amenities tie back to the housing surplus problem. Over the past 40 or so years, the quality of local amenities – something economists call quality of life – explains most population change.

Places that have lost population were places people chose not to live. Either new folks didn’t move there, or, when the jobs left, people chose not to stay.

I know most readers will think, “but when jobs left, people had to leave.” Well, that isn’t true. The biggest job market shocks of the past half-century happened when military bases closed. Amenity-rich locations, like Charleston, South Carolina, and Austin, Texas, actually thrived because people chose to stay and build lives there.

There are 68 counties in Indiana with below-national-average quality-of-life measures, including every one of the 13 counties where home prices are lower today than in 1980. In the top 13 counties, average home prices are 400% higher today than in 1980 after controlling for inflation.

A final key indicator is that, in those high-priced places, home prices are rising faster than wages. The reason is simple. People are willing to pay a premium to move there, not because of housing, but because of schools and other local amenities.

That should be a lesson to everyone who thinks subsidizing the housing supply will affect its demand.