The U.S. faces three types of housing market problems, with three very different types of solutions. Yet, policy efforts at the city level to the state level treat all three the same.

Ironically, this makes things worse across many places—particularly here in Indiana, where our biggest problem is misdiagnosed and mistreated, which ultimately worsens it.

Nationally, the big economic problem is that markets build too few homes in large, highly productive cities. This is not because of some inherent failure of market capitalism, but instead is due to restrictive zoning and regulation. This is also known as NIMBYism, or “not in my backyard.”

Some zoning and land-use regulations are warranted. But, if housing becomes unavailable in highly productive cities, it doesn’t just cause people to move elsewhere. It throttles the national economy. The best estimate of this is that restrictive land-use policies cut well over $1 trillion from the U.S. economy each year (see https://www.aeaweb.org/articles?id=10.1257/mac.20170388).

The good news is that this isn’t really a problem in Indiana. Indeed, all our population growth occurs in the three largest metropolitan areas that affect our state (Chicago, Indianapolis and Louisville). We need to be cautious about restricting housing, but the national NIMBY problem is not a problem in Indiana.

The second problem, which affects parts of Indiana, is that some types of housing are not available in places where they might be needed. This stems from the rapid growth of single-family housing units in more affluent cities, which did not initially include other types of housing. This challenges places like Carmel, Crown Point, Fishers, Noblesville and Zionsville.

Again, the problem here is not that housing markets don’t work, but that zoning and city infrastructure was built to maximize single-family housing. It was zoning rules that caused the problem, not housing markets.

The effect is that many families cannot afford to live near jobs because of restrictive housing types. For example, can a young couple employed as a teacher and firefighter buy a single-family home in Carmel, Fishers or Zionsville? Probably not, but they might afford a condominium or townhouse, of which there are few.

To their credit, the leadership in all the cities I just named have worked hard to solve this problem. They are adding apartments for young people, condos for empty-nesters and other housing options that appeal to a broader set of people who want to access the high-quality schools and local amenities these cities offer.

The third type of housing problem in Indiana afflicts much of the state. Past population decline has led to a crash in the price of housing, so that it is now beneath the replacement cost of building a new home.

My colleagues and I took a well-regarded 2005 study on this topic (see https://www.jstor.org/stable/10.1086/427465?seq=1) and adapted it to Indiana in 2019 (https://projects.cberdata.org/reports/IndHousingMarket-20190206.pdf). We found that there were only 14 Indiana counties where the value of new housing was high enough to clearly guarantee a profit for the builder. In another 17 counties, we found that market prices had risen to the point that some, but probably not all, housing development could be done profitably. That means that, when we did our study, 61 Indiana counties had home prices that were well below the replacement price for that home.

Now, housing prices rose during and after COVID-19, rearranging this geography a bit. However, the cost of construction also rose. With tariffs on perhaps 10% of housing inputs and restricted immigration, the cost of building a new home this summer is now much higher than last year. But, prices are beginning to drop, so we’re back in a position where two-thirds of Indiana counties suffer from an excess supply problem.

The economics are straightforward, but bear repeating. An increase in the demand for housing comes from having an increase in the number of families in your city, typically combined with higher incomes. If there are fewer families, then demand for housing declines. It is just math.

A full 35 Hoosier counties have lost population since 2000, and another 35 having had less than 5% population growth. That’s the demand-side issue across the state.

Housing is a durable capital stock, so most homes built in Indiana before World War II are still standing. According to the U.S. Census Bureau, there were almost 250,000 habitable, yet vacant, homes across the state as of 2023. This does not include derelict housing that could be repaired. That is the supply-side issue.

It is worth noting that these homes do not appear in real estate listings. That causes real estate agents and builders to mistakenly claim there’s a housing shortage. That is piffle. These excess homes don’t appear in the Realtor listings because real estate agents cannot make money selling them. The fact that agents don’t list another quarter-million homes is clear evidence of this problem.

If you put the two of these together, you find that in two-thirds of counties, declining demand for housing has suppressed prices below the replacement cost of that home. That effectively ends the market for new housing, unless the government subsidizes the demolition of vacant homes (supply-side) or building of new homes. The demolition of vacant homes improves market conditions, while subsidizing new construction worsens market conditions.

Subsidizing new homes to sell them below cost further reduces the value of existing homes across the city. Economists see this data in home assessments years after it happens. But, people working to fix housing markets should see it almost immediately in the form of what are called “appraisal gaps.” This means that the appraised value is too low for mortgage bankers to lend to the area.

So, if you are a real estate agent or builder who is frustrated by appraisal gaps that make it impossible to build new housing, don’t blame the banks; blame the people who are working to fix a demand-side problem with counterproductive supply-side solutions.

Just to be clear, the problem is not that there is some mysterious failure of housing markets. Housing markets are saying loud and clear, “Don’t build here until you improve demand for housing.”