A new report from Indiana University’s Kelley School of Business reveals a significant increase in serious delinquencies for Federal Housing Administration (FHA) loans, pointing to widespread financial stress among American households rather than issues within the housing market itself. Experts say the trend is a key indicator of broader economic pressures affecting families.
The Fall 2025 Kelley Real Estate Outlook, a biannual publication, combines academic research with industry insights to provide a comprehensive view of the current market. The findings suggest that while the housing sector has safeguards against a 2008-style crisis, rising costs of living are straining homeowners' ability to keep up with mortgage payments.
Key Takeaways
- Serious FHA loan delinquencies (90+ days past due) jumped from 3.7% in mid-2024 to 4.8% by February 2025.
- Researchers attribute the rise to general financial stress, not relaxed lending standards or a slowing housing market.
- Inflation outpacing wage growth is a primary driver, reducing families' ability to handle unexpected expenses.
- Central Indiana’s new home construction market is showing resilience, with building permits up 6% year-over-year, bucking national trends.
- Housing affordability remains the top concern for both builders and buyers nationwide due to high labor, material, and land costs.
A Closer Look at FHA Loan Defaults
Researchers from the Kelley School of Business and the Urban Institute investigated the sharp rise in FHA loan delinquencies. These government-insured loans are crucial for many first-time homebuyers, requiring a down payment as low as 3.5%.
The study, featured in the new outlook, found that the number of FHA loans considered seriously delinquent—meaning payments are 90 days or more past due—climbed by more than a full percentage point in just over six months.
Delinquency Data
Between mid-2024 and February 2025, the delinquency rate for FHA mortgages increased from 3.7% to 4.8%. This rapid increase prompted a deeper analysis into its root causes.
Jun Zhu, a clinical associate professor of finance at Kelley, explained that the research team initially examined common culprits. These included potentially relaxed lending standards, slowing home price appreciation, or even homeowners strategically defaulting due to improved loss mitigation programs.
"But according to our study, none of these explanations hold water. In fact, the answer turned out to be much simpler than expected," Zhu stated. The conclusion was clear: borrowers are simply under greater financial pressure.
The core issue identified is that household incomes are not keeping pace with the rising cost of living. "Inflation has consistently outpaced wage growth, eroding families’ ability to build the emergency savings needed to weather unexpected financial shocks," Zhu wrote.
A Widespread Affordability Crisis
The financial strain is not isolated to the housing market. The report highlights a troubling trend across various forms of consumer debt. Delinquency rates have also been climbing for auto loans, credit cards, and buy-now-pay-later products.
This pattern suggests a broad-based affordability crisis rather than a problem specific to real estate. Families are struggling to manage their expenses across the board, and for many, the mortgage is just one part of a larger financial puzzle.
Compounding Financial Pressures
Several additional factors are worsening the financial situation for homeowners:
- Natural Disasters: An unprecedented frequency of natural disasters has led to unexpected repair costs for many.
- Insurance Premiums: Homeowners' insurance costs have skyrocketed in many regions, adding a significant and often unpredictable expense.
- Property Taxes: Rising property taxes particularly affect newer homeowners who have not yet built up a substantial equity cushion.
Despite these challenges, experts emphasize that the current situation is fundamentally different from the 2008 housing crisis. The financial system now has stronger safeguards, including enhanced foreclosure-prevention tools and a well-funded FHA insurance fund, which help mitigate systemic risk.
Construction Trends in Central Indiana
While homeowners face financial headwinds, the new construction market in some regions shows surprising strength. Chris Hancock, CEO of the Builders Association of Greater Indianapolis (BAGI), contributed an analysis of Central Indiana's housing market to the report.
Hancock noted that while national trends point to slowing growth in new home construction, the nine-county Indianapolis region tells a different story. "In Central Indiana, the new home construction market remains resilient," he wrote.
Indiana's Building Boom
Data from BAGI shows a 6% year-over-year increase in single-family building permits for June 2025. For the first half of 2025, total permits filed in the region were up 6% compared to the same period in 2024.
This local performance stands in sharp contrast to the slower growth seen nationally. However, builders in Indiana and across the country face persistent challenges that continue to drive up costs.
The Challenge of Affordability
Even with stabilizing home prices in 2025, affordability remains the most significant hurdle for the housing industry. Hancock identified a "trifecta" of issues impacting what builders can construct and what buyers can afford.
These key challenges include:
- Rising Labor Costs: A shortage of skilled labor continues to push construction wages higher.
- Elevated Material Prices: While some supply chain issues have eased, the cost of many building materials remains high.
- Tighter Lending Conditions: Higher interest rates and stricter lending standards make it more difficult for both builders to finance projects and buyers to secure mortgages.
Hancock concluded that overcoming these obstacles will require a collaborative effort. "If stakeholders work together to address these challenges, Central Indiana can maintain its position as a dynamic and accessible housing market," he stated.
Bridging Data and Practice
The Kelley Real Estate Outlook aims to make complex data accessible to the public and industry professionals. Sara Coers, associate director of the IU Center for Real Estate Studies, emphasized the need for reliable, free information in an increasingly data-driven world.
"Our world is increasingly data-driven, and while technology has transformed real estate development, most people still lack access to free, reliable data," said Coers. "We aim to provide meaningful, data-driven insights that go beyond surface-level trends."
The report includes tools like the Power Grid, which consolidates key market metrics into a single, accessible resource. By presenting academic research in clear, industry-focused language, the outlook serves as a vital roadmap for understanding the forces shaping today's housing market in Indiana and beyond.
