Why does it cost so much to build affordable housing?

Development of affordable housing is expensive when compared to market-rate housing development. Whereas the average single-family home in Southeast Michigan sold for $150,000^[1], the per unit cost of affordable housing development can be $200,000 or more.

The reasons for this steep cost difference include:

• Compliance: Appropriately, affordable housing developments are subject to high levels of oversight requirements, which account for a significant portion of the difference in cost. While these compliance requirements fulfill the important function of ensuring public and private funding supporting the developments is used efficiently, they add costs in the form of upfront fees and extra staff time. Examples include conducting environmental reviews, filing reporting paperwork with funders, audits, cost certifications, and additional market studies.
• Competitive funding: Affordable housing projects must compete for funds and are assessed against a variety of social policy standards such as green building design elements, enhanced community amenities and services, historic preseveration standards and sustainable building standards, all of which add to the overall cost of a development.
• Supportive services: Most affordable housing developments provide supportive services to a portion if not all of the units in the developments. These services may include comprehensive case management and assistance with connecting to available mainstream resources.
• Operating and Replacement Reserves: Affordable housing developments don’t produce as much cash flow from operations as market rate developments, and they are required to have significant operating reserves funded up front to ensure long term sustainability. In addition, because affordable housing developments have significant long-term retention periods, (typically 15 to 30 years) they are required to have significant replacement reserves to provide for future capital improvements, such as new roofs, driveways and other major systems.
• Construction requirements: Funding sources require that developments adhere to specific construction requirements to meet habitability standards that drive up the per square foot cost of construction. They are also required to meet fair wage requirements through the Davis-Bacon Act.

Developers are motivated to take on these extra costs because of the long-term social and economic benefits brought about by many affordable housing developments. They create housing that is affordable to working individuals and families who would otherwise have to pay a disproportionate part of their income on housing.

[1] Realcomp Online (2015). Average sale price Sept-Dec 2015.

Elizabeth Ireland is CHN’s former Grant and Program Analyst.