Indy's surprising housing problem

Nationally renowned for its low rents and buyer-friendly home market, the Indianapolis metro area's reputation as a cheap place to live masks a problem faced by nearly 1 in 3 residents.

Wages are so low — and income inequality so pronounced — that for many families, housing costs still represent a major barrier to a better quality of life, according to a new study on housing affordability.

To be clear, even with the recent uptick in home prices, there's still plenty to like about the Central Indiana housing market.

Below-average rents led Forbes this year to name Indy the 10th-best city for millennials. And the broader Indianapolis metro area consistently ranks among the most affordable places to buy a home — in the late 2000s, Indianapolis placed first among large cities for a whopping four straight years in a housing affordability index maintained by Wells Fargo.

Many of these metrics try to account for wages, but they're frequently distorted by higher incomes in places such as Carmel, Zionsville and Geist. One study by the Brookings Institution found that during the recession, the gap between rich and poor in the Indianapolis area grew the seventh most among major cities.

As a result, based on U.S. Census data, 30 percent of families in the metro area face what's considered a "housing cost burden." In Indianapolis, it's even higher: 36 percent, as of 2014. And when you throw in transportation costs, even the suburban doughnut counties fare poorly on affordability.

"When considering transportation costs alongside housing costs ... much of Central Indiana is unaffordable," concluded John Marron, a local public policy researcher who has been studying housing affordability in the metro area.

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"Housing cost burden"

Marron, a former senior policy analyst with the Indiana University Public Policy Institute, revealed some preliminary findings of his research Thursday at a community discussion hosted by WFYI and SAVI, a data portal maintained by the Polis Center at Indiana University-Purdue University Indianapolis. He's expected to release a final report in the coming weeks.

"Housing cost burden" is a statistic that measures how much of a person's income gets eaten up each month by housing and utilities. The U.S. Census Bureau considers anything more than 30 percent to be a burden on a household budget.

In Indianapolis' poorest neighborhoods, the figures are alarming: In the neighborhoods around Fountain Square, for instance, 54 percent of residents had a housing cost burden in 2014, according to census data maintained by SAVI. On the near eastside, 45 percent of families are considered burdened.

To account for the costs of commuting, many policy analysts are moving toward a different benchmark: Households that spend more than 45 percent of their income on transportation and housing. By that measure, even Indy's suburban areas start to look unaffordable for many.

“Cost burden is not just something that’s in the inner city," Marron said. "It’s really spread throughout."

No silver bullet

The problem may get worse before it gets better.

After years of stagnation, housing prices in Indianapolis are surging, as the supply has struggled to meet the demand — particularly Downtown. And in areas where home prices remain affordable, many residents face other obstacles, Marron said, such as bad credit or an inability to save enough for a down payment.

Another problem: A lag in appraisals makes it hard even for buyers with good credit to secure financing in up-and-coming neighborhoods, because homes are selling for far above their assessed value. As a result, first-time millennial homebuyers who could benefit financially from swapping out rent payments for a mortgage are frequently losing out to empty nesters who have cash on hand.

The solution?

Marron offers no silver bullet. Jobs that pay better wages would help, of course. Local governments can make a difference, too, by encouraging density and supporting community development groups.

One thing that could help: the Great Places 2020 program in Indianapolis, which hopes to create six new complete neighborhoods with access to good housing, jobs and transit.

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One thing that won't work, he says, is expecting subsidized housing to fill the gap.

“We can’t subsidize our way to affordability," he said, in large part because federal housing assistance has plummeted during the past decade.

In inflation-adjusted dollars, Indianapolis received about $23 million in 2002 from three major U.S. Housing and Urban Development affordable housing programs, Marron said. By 2015, that figure had dropped nearly 50 percent to about $12 million.

The good news? It could certainly be worse. While some similar-sized cities such as Denver, Kansas City and San Francisco saw rents spike by 7 to 14 percent in 2014, according to real estate research firm Zillow, here in Indy, rental costs have largely tracked inflation.

Call IndyStar reporter Brian Eason at (317) 444-6129. Follow him on Twitter: @brianeason.