The Indianapolis housing market has an affordability problem we can’t build our way out of

From the outside, the housing market in the Indianapolis Metropolitan Statistical Area (MSA) remains affordable and accessible, even though it has been more competitive than ever in recent years. From the inside, the market is slipping further and further out of reach for many Hoosiers, particularly those households earning moderate incomes — the workforce. The cause of this growing unattainability is the fundamental lack of sufficient supply to facilitate a healthy market (known as frictional vacancy — more on this later), which has in turn reshaped affordability, limited mobility and created potential long-term economic consequences for the region. The solution proposed by many is to build more houses. Is this a problem we can build our way out of?

Frictional vacancy continues to evaporate

For years, the conversation around housing has focused on mortgage rates, inflation and home prices. With no hope of a return to the historically low mortgages rates of the early 2020s and inflation tamped down into the two and three percents for nearly three years, the conditions that allowed home prices to skyrocket in 2021 and 2022 appear to have diminished. So, why haven’t prices in the Indianapolis MSA “normalized?” The answer has two parts: one, how much we are building, and two, who we are building for.

In some markets with a high level of building, prices have begun to recede. In Austin, Texas, for example, significant additions to supply (120,000 new homes¹) caused a price correction: Median home prices peaked at $622,000 in May 2022 and are down to $550,000 in March 2026.² In fact, 89 of the nation’s 300 largest housing markets saw median home prices decline from March 2025 to March 2026.³ Despite recent indicators that the Indianapolis MSA strong sellers’ market of recent years has begun to soften, data from the Metropolitan Indianapolis Board of Realtors (MIBOR) indicate the median home price has grown 1.6% year-over-year to $310,000 as of March 2026 (indicating nearly 37% growth since March 2021, when the median home price was $226,500).⁴

The Indianapolis MSA’s building permit activity as a percent of housing supply exceeds that of the state and country, and this is not a recent phenomenon. New construction of housing units in the Indianapolis MSA as a percentage of housing supply is consistently above Indiana and the United States, dating back to 2011 (see Figure 1).

Figure 1: Building permits as a percentage of housing supply

Source: STATS Indiana, BAGI (Builders Association of Greater Indianapolis)

Despite ongoing new construction at this above-typical rate, there is a lack of frictional vacancy, meaning there is insufficient supply to facilitate a healthy housing market. Frictional vacancy refers to the amount of vacant housing necessary for normal market turnover. The concept dates back to 1947, when Hauser and Jaffe observed that housing markets require a certain level of vacancy because people are constantly moving, changing jobs, forming households, downsizing or relocating.⁵ In 2018, Freddie Mac estimated that approximately 13% frictional vacancy is necessary nationally to maintain market equilibrium.⁶

Frictional vacancy is a structural issue in the housing market. When available housing falls too low, the market stops functioning efficiently. Buyers compete aggressively for limited inventory. Prices rise faster than incomes. Existing homeowners become reluctant to move because replacement housing is scarce and expensive. Builders struggle to deliver homes at attainable price points. Sound familiar? The Indianapolis MSA continued to lose ground in the battle for frictional vacancy over the last decade (see Figure 2), largely due to lack of new construction as a result of two things: lingering oversupply conditions created prior to the Great Recession and lack of lending on new housing development.

Figure 2: Vacant units + Permitted new units = Total frictional vacancy

Source: STATS Indiana, U.S. Census Bureau and author's calculations

2021 marked the point when these pressures fully surfaced. In the mid-2010s, population growth generally exceeded household formation, as the lasting economic impact of the Great Recession resulted in more multi-generational households. However, after years of delayed household formation, millennials began forming households rapidly when the country emerged from the pandemic lockdown in 2021, and significant breakup of multi-generational households occurred. Household formation continued to exceed population growth through 2024 (see Figure 3).

Figure 3: Population growth rates vs. household formation rates

Source: STATS Indiana

With such significant household formation, limited vacant housing units and limited additions to the housing supply, frictional vacancy fell well below the amount needed for a healthy, functional market. The effect of insufficient frictional vacancy is upward pressure on prices, and the affordability consequences have been severe.

Affordability issues rear their ugly head

With $83,500 added to the median home price in the last five years, the affordability math is not working for a significant number of central Indiana residents. Within housing, workforce is traditionally defined as those who make too much money to live in income-qualified affordable housing (qualifications of 60% or less of area median household income (AMHI)) and don’t make enough to afford traditional market-rate housing (120% or more of AMHI). For the Indianapolis MSA, where the median household income is $80,239, that means households that earn between $48,143 and $96,287 per year, or roughly 29% of MSA households, fall into the workforce category. Thirty-five percent of Indianapolis MSA households earn less than $50,000 per year, right around the low end of the “workforce” income range (see Figure 4). With the perennially undersupplied status of income-qualified affordable housing, many of these households shift upward into the workforce housing market.

Figure 4: Percent of households by income bracket in the Indianapolis MSA

Source: PolicyMap, author’s calculations

Assuming that households spend 30% of their gross income on housing (the benchmark over which households become housing-cost burdened) and that all 30% can go towards a house payment, along with an average interest rate of 6.5% and a 20% down payment (all extremely generous allowances considering the burden of having sufficient credit; saving for down payments; and high household expenses such as property taxes, insurance and utilities), households can be redistributed based on the price range they can afford to pay for a home. Based on the $310,000 price for existing homes, approximately 39% of households in the Indianapolis MSA cannot afford the median existing home price (see Figure 5).

Figure 5: Percent of households by price range they can afford in the Indianapolis MSA

Source: PolicyMap, MIBOR Market Insights and author’s calculations

Homes are generally not getting cheaper, so the question becomes: Can we increase supply enough to hit the release valve on this pressure cooker of a housing market?

Is new construction the cure to what ails us?

In 2024, the Indianapolis MSA had approximately 8.5% frictional vacancy, meaning there were just over 77,000 housing units either vacant or newly constructed, and nearly 14,000 new households were formed. Based on actual and projected housing starts through 2031 and conservative projection of new household formation at 1.25% annually, housing starts may finally come abreast of new households by the end of the decade (see Figure 6).

Figure 6: Indianapolis MSA housing starts vs. new households (actual and projected)

Source: BAGI and author’s calculations

However, these projections show starts will barely keep up with household formation, so no or extremely limited frictional vacancy supply can accumulate, leaving the MSA in the same situation it is in right now.

Can new construction help alleviate the issue? Due to sustained high construction costs, new construction homes are significantly more expensive. Using the same assumptions as before, approximately 51% of the MSA cannot afford today’s median new construction home price of $404,945 (see Figure 7).

Figure 7: Percent of households by price range they can afford for new construction home in the Indianapolis MSA

Source: PolicyMap, MIBOR Market Insights and author’s calculations

There is a distinct mismatch between the price range of 2026 housing starts compared to the composition of households by the home price they can afford (see Figure 8). Zero homes are being built under $225,000, so new construction offers no solutions for nearly 190,000 households. Roughly 300 homes are being constructed at the entry point for new construction of $225,000 to $275,000, a price range that encompasses about 60,000 households. This does not include the households that would likely stretch beyond 30% of their gross income to afford a home — homeowners earning under $75,000 per year are significantly more likely to be housing-cost burdened — meaning the 200-to-1 ratio of households to new construction homes in the entry-price range is likely a significant understatement.⁷

Figure 8: Households vs. new housing starts prices in the Indianapolis MSA, 2026

Source: PolicyMap, BAGI and author’s calculations

These data suggest that the current state of new construction is not rectifying the affordability problem facing central Indiana, but does that mean new construction can’t be a vital part of the solution?

Housing affordability is a workforce issue

Housing affordability cannot improve meaningfully if supply remains constrained, entry-level construction remains economically infeasible and frictional vacancy remains insufficient. The bottom line facing the Indianapolis metro is that our housing affordability issue has inevitably become a workforce issue. Many of the employees that keep the regional economy functioning — logistics workers, retail employees, hospitality staff, health care support workers and service-sector employees — have decreasing housing options and increasing housing-cost burdens. Approximately 18% of the workforce is employed in logistics and retail alone, earning typical wages between $40,000 and $60,000 annually, equating to the ability to afford homes in the range of $198,000 to $296,000, assuming they can accumulate a 20% down payment and also afford their household expenses on top of that. When the workforce has inadequate housing options or lack of affordability, they move on to the next location. Therefore, it becomes imperative to create workforce housing incentives, reduce time and cost for entitlements, find a way to increase production across lower price points or likely all of the above. The question is no longer can Hoosiers afford to own homes; the question has become can Indianapolis afford to lose its workforce?