Indiana Housing Crisis Explained: Why Home Prices Keep Rising

There was an interesting article from Stateline about the high-density housing we’ve been seeing in Indiana and what may be coming next. Stateline works with the Indiana Capital Chronicle and similar nonprofit publications across the country that report on government issues. The housing shortage we’re seeing today was largely created by government policy. The federal government—and in many ways the state government—played a major role in creating the conditions we’re dealing with now.

How the debacle began

First, in 2020 the government essentially turned on the money printing press. Roughly $5 trillion was injected into the economy. That flooded the market with money. At the same time, interest rates were pushed down to around 2 percent or even lower for some buyers. The result was predictable. Housing prices skyrocketed. People could suddenly afford to pay far more for homes because borrowing money was so cheap. Many of us warned about this five or six years ago. The problem was obvious: eventually those low interest rates wouldn’t last. Eventually they would rise. When that happened, people who bought homes at extremely low rates would become stuck. If you bought a $400,000 house with a 2 percent mortgage, that looked like a great deal. But if someone trying to buy that same house later has to take out a 6 or 6.5 percent mortgage, the math changes dramatically. So homeowners are reluctant to move. They’re locked into their current homes unless they suddenly come into a large amount of money. That reduces the number of homes on the market, which makes the housing shortage worse. That was the first major policy decision that contributed to the problem. The second factor has been immigration policy over the past decade, particularly during the administration of Joe Biden. The country has seen large numbers of people entering both legally and illegally. That includes asylum seekers and workers on visas. On top of that, there are millions of people who entered the country illegally. All of those individuals still need somewhere to live. They are participating in the rental market or the housing market just like everyone else. When you combine fewer homes being available with more people needing housing, you create a shortage. The supply shrinks while the demand grows. The logical response, some would argue, would be to reduce the number of people entering the country and address the interest rate environment that has trapped many homeowners in place. Interest rates shouldn’t be artificially low, but they also shouldn’t become such a barrier that people can’t access housing. The government, however, pursued a different path after COVID. Officials wanted people to believe they could shut down society without consequences. That simply wasn’t true. The disruptions from those policies are still being felt today and likely will be for generations. In Indiana, one example involves Medicaid expansion during the administration of Eric Holcomb. Large numbers of people were added to the Medicaid rolls during COVID as part of efforts to cushion the economic shutdowns. The idea was that people would lose jobs and benefits but government programs would fill the gap.

These policies have long-term effects.

Instead of addressing the underlying causes of the housing shortage, governments across the country have begun pushing policies that encourage high-density housing developments with fewer regulatory standards. The idea is to make housing cheaper by increasing supply quickly. The challenge is that many local communities don’t want those developments. Residents often prefer maintaining certain zoning standards and having input into how their neighborhoods grow. In Indiana, lawmakers passed legislation limiting the ability of local governments to enforce zoning rules that block certain high-density housing developments. The law also reduced requirements for public hearings where residents could voice objections to projects in their communities. Essentially, the state told local communities that they would have less authority over how development happens in their own neighborhoods. Support for the measure came from Republicans and Democrats alike. A few years ago I had a conversation with a prominent suburban school superintendent in central Indiana. I won’t name the person because the discussion was candid and off the record. We talked for nearly two hours about education policy. One of the points they raised was how local governments often focus on the assessed value of homes when approving large housing developments. A builder might say the average home will be worth $450,000, which sounds like a major benefit for local tax revenue. But the superintendent explained that the reality can be more complicated. In some cases, those homes end up housing multiple generations or multiple families. When that happens, the number of people relying on public services increases significantly. For example, a $450,000 home with one family and two children might be manageable for a school district. But if multiple families live in that same home and there are six children attending school, the financial equation changes dramatically. At that point, the property tax revenue associated with that house may no longer cover the cost of services required. In effect, the property becomes a net loss for taxpayers.

Why more houses and businesses don’t eliminate the need for higher taxes

When people ask why all this growth doesn’t seem to pay for itself—why more houses and businesses don’t eliminate the need for higher taxes—this is part of the explanation. In some cases, the cost of services grows faster than the revenue those properties generate. I’ve seen examples of this firsthand. Years ago I lived in a newer housing development. The neighbors on both sides of me were from Nigeria. They were nice people, but both households included multiple generations living together. Several families were sharing the homes. They weren’t breaking any laws. They weren’t doing anything wrong. But it illustrates how housing patterns can change in ways that local governments didn’t originally anticipate. These situations happen all over the place, and everyone knows it’s happening. Yet the response from the state has been to reduce local governments’ ability to address the issue. As a result, many communities are losing the unique identity they once had. Neighborhoods that once had a distinct character are becoming more uniform. The sense of shared identity—the fabric that once tied communities together—is gradually disappearing.