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Sunday, August 28th, 2011

“Sick Housing Market” Ranking Shows Why Many “Top-10” Lists Should Be Deep Sixed by Drew Klacik

The financial news and opinion site 24/7 Wall St. recently ranked Indianapolis number two in its list of America’s 10 sickest housing markets.

I’ve always been fascinated by top-10 lists. Fellow Hoosier David Letterman delivers one every evening. Purdue fans get excited when their basketball team makes the top 10. IU fans hope to earn that distinction too, because recent recruits are ranked in the top 10. Then, of course, there’s the Big 10, which is so enamored of top-10 lists that it retains its name despite having 12 teams.

The Big 10 (12) example points to a big challenge for top 10 list makers. Sometimes, there’s little difference between number 10 and number 11 – or even number 25 for that matter.

A second challenge is that often, a list’s creator fails to fully or even partially explain how the list came to be.

A third challenge is that two different organizations, each ranking the same thing, can come to different conclusions. Take football, for example. The various polls often disagree as to who’s number one.

Given these list-making challenges, I decided to examine Indianapolis’ housing ignominy to determine whether we are justifiably bottom-of-the barrel.

To start, I compared some of the 24/7 Wall St. data for Indianapolis to a few cities that didn’t make the bottom 10.

The key criteria used in this ranking were homeowner and rental vacancy rates for either the 75 largest U.S. cities or, more likely, their metropolitan areas. They excluded from their list any locale that improved its vacancy rate over the last year or quarter and then enhanced the data set with unemployment rates and median home prices.

Of the 75 areas considered, Indianapolis had the fifth-highest home vacancy rate and tenth-highest rental vacancy rate. These are troubling statistics that clearly suggest a supply-and-demand issue. Indianapolis likely needs to reduce the supply of homes and rental units and/or increase demand by attracting more owners and renters.

Tucson, the one city deemed to have a sicker housing market than Indianapolis, had the highest home vacancy rate and sixth-highest rental vacancy rate.

But here’s where it gets confusing: When considering some other housing-market fundamentals, Indianapolis appears very sound. For example, between 2008 and 2010, the median sales price for a home in the Indianapolis metro area increased by $12,100 or 10.9 percent.

The only community on the 10 sickest-housing-market cities list to experience a greater increase in median sales prices was Oklahoma City (13.7 percent). Only two others had any increase at all.

To further confuse matters, Cincinnati, Milwaukee and Minneapolis didn’t make the sick-housing-market cities list, yet all experienced a decline in median sales prices – Minneapolis with a precipitous 15.5 percent drop. That’s certainly sickening to would-be sellers.

In addition to its sales-price success, Indianapolis was one of six sick-housing-market cities to experience a decline in unemployment (from 10 percent in June 2010 to 9.1 percent in June 2011) – generally a positive indicator for the housing market. Meanwhile, Milwaukee, Minneapolis and Nashville (also not on the list of 10) all experienced an increase in unemployment during the same period. If people aren’t working, they struggle to buy houses.

Then there’s population growth. Between 2000 and 2010, Indianapolis grew by 12.6 percent – fourth fastest among the sick-housing-market communities. Only three on the list (Detroit, Dayton and St. Louis) experienced population loss. Yet other cities suffering losses – including Cincinnati and Milwaukee – were somehow deemed healthy for housing. Go figure.

By now, you might be asking yourself how Indianapolis can be increasing employment and gaining population yet still have high vacancy rates and a sick housing market?

At least part of the answer is that between 2000 and 2010, while Indianapolis added 39,963 people, it also added 36,893 new housing units. That’s a lot of property per resident.

While there’s plenty of room to debate the details of Indianapolis’ sick-housing-market ranking, we undoubtedly have serious and difficult work to do if we’re to address our supply-and-demand imbalance while keeping local housing affordable (we rank in the top 10 for that!).

On the other hand, it might be best to not be in the top ten in either the “sick” or “affordable” lists. Then, Indianapolis would have more balanced market fundamentals, fewer vacant houses and better price appreciation.

As for top-10 lists in general, they’re about image. The data provide the real substance. And when it comes to substance, fundamentals matter, as the Butler University men’s basketball team taught us the past two seasons by proving that you don’t need to be in the top 10 to make the Final Four.

Drew Klacik is a policy analyst for the Indiana University Public Policy Institute at IUPUI. He focuses on public policy related to economic development, state and local taxation, affordable housing and neighborhood development.

Tuesday, January 26th, 2010

Drew Klacik: Place-Based Clusters

Indiana’s Cities and Their Contributions to the State’s Economic and Fiscal Condition

The Indiana Fiscal Policy Institute (IFPI) and the Ball State University Center for Business and Economic Research recently released a report that proves that in Indiana, as in most other states, when it comes to funding state government urban areas subsidize rural areas (Intrastate Distribution of State Government Revenues and Expenditures in Indiana, 2010). Civic leaders in Indianapolis and other urban areas often battle the perception that urban areas are net takers. But the fact that large urban areas are now documented as net givers rather than net takers may not be enough to change that perception and the entrenched anti-urban bias that accompanies it.

The IFPI report does an excellent job of documenting the patterns of state revenue collection and distribution. However, focusing solely on state revenue ignores the locally subsidized contributions most of these urban counties make to their regions and the state. These contributions include investments in growing the state’s economy in the form of tax abatement and tax increment financing, as well as the provision of services to large, regionally important tax-exempt properties.

For example, the city of Indianapolis provides both tax abatement and TIF to support the hotels, restaurants, and shopping facilities required to attract conventions, Big Ten and Final Four tournaments, and even the Super Bowl to the state. When these big events come to Indianapolis, it is primarily the taxpayers of Marion County who pay for the services, such as public safety, that visitors consume. Additionally, many of the facilities that attract visitors, including the convention center, football stadium, and basketball arena are tax exempt yet located on valuable property.

In addition, core cities make contributions to regional and state economies that go well beyond the convention and tourism industry. In Indianapolis, TIF and tax abatement have been used to attract and retain firms in the life sciences, information technology, advanced manufacturing, and a wide variety of other professions. Indianapolis is home to 18 percent of all the jobs in Indiana and 24 percent of all wages earned. The fact that the share of wages is higher than the share of jobs suggests that the jobs located in Indianapolis are of high value.

I suspect that this evidence is not going to result in an outpouring of support for Indianapolis or any other of Indiana’s urban counties. But what if we looked at the state’s economy spatially rather than from the now traditional industry cluster perspective? Virtually everyone accepts that the life sciences, transportation, distribution and logistics, advanced manufacturing, clean-energy, motor sports, and information technology are the competitively advantaged economic clusters that are essential to Indiana’s economic future. However, if we looked at the state’s economy geographically there are eight place-based clusters in Indiana that contain 48 percent of all the state’s jobs and 54 percent of all the wages earned in Indiana. Furthermore, when you add in their subsidiaries or places where employment and wages are attributable to the core industry, the share of Indiana’s employment increases to 66 percent and wages to 68 percent.

Those eight place-based clusters are Indiana’s most populous and most urban counties—Allen, Elkhart, Lake, Marion, Monroe, St. Joseph, Tippecanoe, and Vanderburgh counties. All but Elkhart are net givers rather than takers. The subsidiaries are the suburban counties that comprise the metropolitan areas that surround these core counties and prosper due to their proximity. By definition, without a core city/county there cannot be an affluent suburban county.

Indiana’s Place-Based Clusters (Graphic by Luke Renn)

To suggest that we think of clusters as place based as well as the more traditional industry perspective is not intended to diminish the importance of industry clusters, rather it seeks to acknowledge that many of our competitively advantaged industries are located in these urban counties and their surrounding metropolitan areas. For example, a study of the life sciences industry in 2000 found that 48 percent of all life science industries in 30 central Indiana counties were located in Marion County (Indianapolis) and an additional 11 percent of the Central Indiana life science firms were located in Monroe and Tippecanoe counties (two of the other core place-based clusters.*

Life sciences employment in Central Indiana

Of course, there are key exceptions scattered throughout Indiana, such as the life science firms in and around Warsaw and advanced manufacturing facilities such as the new Honda plant in Greensburg. More importantly, when we think about supporting the state’s economy, it does not have to be one cluster or the other, rather we should support both the industry clusters and the places where many of those firms are located (the eight core counties). As the attraction and retention of human capital continues to emerge as an important economic development strategy, making sure the place-based clusters are exciting and appealing is becoming an increasingly important strategy to assure that our cluster industries can attract the creative class workers they need to thrive.

These key urban counties have many economic and cultural assets, but not all is positive. Fifty percent of all individuals living in poverty in the state in 2007 resided in these eight counties, average educational attainment levels trail the state average, and many of the urban counties have high crime rates. These issues and others threaten the ability of these counties to continue to be net givers supporting the state’s economy and generate the revenue necessary to invest in the future of our small towns and rural counties

As Indiana and the nation seek to emerge from the most serious economic downturn since the Great Depression, it may make sense to turn to history and consider a notion first espoused by the 1937 National Resources Committee’s report – Our Cities: Their Role in the National Economy. The report suggested that big cities are the drivers of the nation’s economy and that as go the cities so goes the nation. As Indiana begins to work its way out of the recession of 2008-09 perhaps it makes sense to recognize the economic and fiscal importance of Indiana’s place-based clusters and consider how Indiana might invest in our economic clusters (the key industries) and our place-based clusters (where the key industries are located) to jump start our state’s economy. Perhaps most importantly, as the IFPI study suggests, without the tax revenue associated with these economically vital urban areas there will not be any resources to invest in the future of the state’s small towns and rural counties.

Thus investing in our urban areas is not taking resources away from small towns and rural counties, rather investing in our urban areas and making certain that they continue to remain economically competitive is actually a strategy that assures that we continue to have the resources to support the entire state. We cannot have a great Indiana without a healthy core.

* Wolcott, Susan. The Life Science Cluster in Central Indiana. The Center for Urban Policy and the Environment 2001.

Drew Klacik is a Senior Policy Analyst at the Indiana University Public Policy Institute’s Center for Urban Policy and the Environment at IUPUI. Drew’s principal areas of work include economic development, state and local taxation, and community development policy. Much of his work is focused on trying to understand how these issues interact and affect the quality of life and economic vitality of regions. He can be contacted at dklacik@iupui.edu.

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