The expensive business of building affordable housing
So you would think with such high demand the solution would be simple. Just build more low-income housing, right?
Well, it turns out building affordable housing is not so affordable.
In 2015, the average single-family home in southeast Michigan sold for $150,000. The per unit cost of affordable housing developments can be $200,000 or more.
According to the Community Housing Network, the reasons for the steep cost difference include:
- Compliance and oversight requirements;
- Competitive funding;
- Supportive services provided to residents in the units;
- Operating and replacement reserves to ensure long-term sustainability; and
- Construction requirements.
Developers need to get funding for construction before people move in and start paying rent. But they can only get loans and equity sources if the development will produce enough revenue to pay back the loans and pay returns to investors.
The main source of funding for developers who want to build affordable housing is the Low-Income Housing Tax Credit. It's federally financed, but administered by state housing authorities. According to The Urban Institute:
To receive tax credits, a proposed development must dedicate at least either 20 percent of its apartments to people who earn less than half of the area median income or 40 percent of its apartments to people who earn less than 60 percent of area median income. To be affordable, the rent for those apartments must be no more than 30 percent of the target income level. Yet, even if a proposal meets these conditions, tax credits aren't guaranteed. States allocate tax credits through a competitive process that varies by state and in most places has many more applications than available credits.
But the money from the tax credit is not enough. Most developers rely on a mortgage, tax credits, and other sources of money - using 20 or more financing sources is not uncommon. According to Bloomberg:
To really reduce costs or raise revenue, there are just these options: Spend less on land, materials, and labor, or bring in more money by raising rents or finding new public financing. But land, materials, and labor can only be cut so much (construction costs are effectively fixed by labor and commodities markets), and raising rents removes the "affordable" from affordable housing.
About a quarter of U.S. renters spend more on housing than they can afford, according to researchers at Harvard University.
The problem is even worse for low-income families. The National Low Income Housing Coalition finds the U.S. would need to add more than 7 million cheap apartments to meet demand for low-income renters.
So, how can we create more housing for the poorest renters?
One way is more subsidies. Things like vouchers, rental assistance, grants and tax credits. According to The Urban Institute:
No one subsidy can solve the affordable housing problem. Rather, a combination of programs including federal tax credits, state housing trust funds, local zoning decisions, and public land contributions can help affordable housing get built. To close the gap for affordable housing, especially for the lowest-income households, there almost always has to be assistance for both development and rental income over time.
Another way is to build more housing for higher-wage earners, freeing up older, lesser-quality units for lower-wage earners. Reihan Salam, policy fellow at the National Review Institute told Bloomberg:
It's not always politically attractive, because you're talking about housing that has deteriorated a bit. That's basically how housing markets have always worked.
The Urban Institute has an interactive tool that lets you become the developer. You can toggle your costs and expected revenues for an affordable housing project, and see how difficult the process can be. Check out that simulator here.