Housing: Risk Tolerance and Job Growth Are Key to 2015

Director of the Benecki Center for Real Estate Studies, Kelley School of Business, Indiana University

Multifamily housing continues a very good run, but the single-family housing sector has continued to struggle. Job growth, consumer confidence, and access to attractive credit terms are the primary drivers that bring potential homebuyers to the market. Considering these factors, most experts believe the housing market will move in a more positive direction in 2015.

For example, the National Association of Realtors projects that existing home sales will increase 7.7 percent from 2014 levels and new single-family home sales will rise 33.5 percent nationally (see Table 1). Median home prices are also expected to increase slightly.

Table 1: National Housing Outlook

  History Forecast
2012 2013 2014 2015
Home Sales (thousands)
Existing Home Sales 4,660 5,090 4,938 5,316
New Single-Family Sales 368 429 459 613
Home Sales (% Change - Year Ago)
Existing Home Sales 9.4 9.2 -3.0 7.7
New Single-Family Sales 20.3 16.6 7.0 33.5
Median Home Prices ($ thousands)
Existing Home Sales $176.8 $197.1 $207.3 $215.9
New Single-Family Sales $245.2 $268.9 $277.0 $283.3
Median Home Prices (% Change - Year Ago)
Existing Home Sales 6.4 11.5 5.2 4.1
New Single-Family Sales 7.9 9.7 3.0 2.3
Housing Affordability Index* 196 176 165 134

* The housing affordability index measures the ability of a family earning the median income to purchase a median-priced home. Higher index values indicate increased affordability.
Source: National Association of Realtors, “U.S. Economic Outlook: October 2014”

However, the housing market’s risk tolerance is low (as seen in the disappointing results of 2014), and uncertainties abound. These uncertainties include unemployment, wage growth, access to credit, investor activity and tumultuous world affairs.

  • Hiring is gaining momentum, but unemployment remains high—especially when including people who have given up searching for work.

  • Wage growth has been moderate-to-negative for many Americans.

  • Access to attractive credit is questionable, as market participants struggle to find the proper underwriting balance and the Federal Reserve ends its bond-buying program.

  • Single-family investor activity has slowed, and the threat of investors selling their inventories into the market remains.

  • Middle East unrest, Ebola and Europe’s economic climate could negatively impact consumer confidence.

So, while most industry sources support the notion of a more positive 2015, it could mirror the less-than-satisfactory 2014 should these uncertainties take a negative turn.

The probability for a better 2015 in the single-family housing market in our nation’s cities and towns largely depends on job growth and how wages compare to that locale’s median housing price.

One key factor in mortgage qualification is a household’s monthly gross take-home pay relative to its payments for housing costs—the total of the mortgage payment, real estate taxes and home insurance. Holding all other things equal, communities with positive job growth and a favorable margin between wages and housing costs are more likely to experience a stronger single-family real estate market.

Likewise, the greater the margin between wages and housing costs, the higher the risk tolerance of potential buyers in that market. For example, if mortgage rates increase, communities with a wider margin (i.e., higher risk tolerance) would be less impacted and more likely to have stable home-buying markets relative to communities with smaller margins. Thus, risk tolerance and job growth are important indicators to consider when projecting 2015’s housing market.

How Does the Indiana Housing Market Fare with This Reasoning?

In terms of job growth, Indiana is one of 14 states with net job gains since the recession began and an unemployment rate that fell below the national average in 2014 (see Figure 1).

Figure 1: Net Job Gains or Losses since the Start of the Recession and Unemployment Rate by State

figure 1

Note: North Dakota is excluded as an outlier, with an unemployment rate of 2.8 percent and net job gains totaling 29.9 percent since the start of the recession.
Source: Joint Economic Committee of the United States Congress (prepared by the Vice Chair’s staff)

In terms of existing home sales and residential building permits, Indiana has outpaced the nation by 0.6 percentage points and 8.5 percentage points, respectively (see Table 2).

Table 2: Mid-Year Comparison of Indiana and U.S. Housing Markets

  U.S. Indiana
Existing Home Sales, July 2013 to June 2014, Year-over-Year Change 1.4% 2.0%
House Price Appreciation, 2013:2 to 2014:2 6.2% 3.7%
Residential Building Permits, July 2013 to June 2014, Year-over-Year Change 8.1% 16.6%
Share of Mortgages That Are Seriously Delinquent, 2014:2 4.8% 5.2%
Share of Mortgages with Negative Equity, 2014:2 10.7% 5.1%
Housing Affordability Index, March 2014* 172 248

* The housing affordability index measures the ability of a family earning the median income to purchase a median-priced home. Higher index values indicate increased affordability.
Source: IBRC, using data from the Indiana Association of Realtors, National Association of Realtors, Federal Housing Finance Agency, U.S. Census Bureau, Mortgage Bankers Association, CoreLogic and Moody’s Economy.com

However, according to the Indiana Association of Realtors, Indiana’s year-to-date 2014 closed sales number is trending lower than 2013, while its median sale price has increased 2.9 percent year-to-date (see Table 3).

Table 3: Indiana Housing Overview

  September 2013 September 2014 Percent Change Year-to-Date 2013 Year-to-Date 2014 Percent Change
Closed Sales 6,375 6,958 9.1% 58,868 56,752 -3.6%
Median Sales Price 123,500 128,000 3.6% 122,900 126,500 2.9%

Source: Indiana Association of Realtors

When looking at housing costs, Indiana typically has stable housing values. That is, Indiana homeowners usually experience small swings in value as economic conditions and world events take hold year to year.

While Indiana has lagged the country in home price appreciation over the past year, as seen in Table 2, its share of negative mortgage equity is 5.6 percentage points lower. Perhaps most importantly Indiana’s housing affordability remains attractive, with an affordability index value of 248, as interest rates remain low.

Likewise, the ratio between sales price and income has remained stable (see Figure 2). So it follows that, year to year, Indiana generally provides a stable job base and a good wage relative to housing costs.

Figure 2: Ratio of Median Sales Price to Median Household Income

figure 2

Source: IBRC, using U.S. Census Bureau and Moody’s Economy.com data, “Indiana’s Housing Market in 2014: Moving toward Stability”

If Indiana’s economy improves in 2015 with more jobs and better wages, it should mean positive results for the housing market. On the other hand, if some of the negatives of the potential uncertainties mentioned earlier come to fruition, Indiana will weather the storm better than less stable parts of the country.


Overall, 2015 is looking more positive for Indiana and the country. Job growth is experiencing a positive trend and many other economic fundamentals have improved. Thus, consumer confidence should be high. 2015 should see housing market improvement both in Indiana and the nation as a whole—so long as mortgage rates remain generally favorable and there is no catastrophic event.