Rising Construction Costs' Affordable Housing Impacts
Labor shortages, supply chain issues, and rising material costs are all impacting the development of new affordable housing nationwide.
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Despite the shortage of affordable housing units nationwide, many developers are working hard to create new units in heavily undersupplied markets. However, rises in construction costs have made the situation difficult for many contractors: The Associated General Contractors of America pegged increases at 21.4% from March 2021 to March 2022. And that figure excludes increases to labor costs, owing to a severe labor shortage in the construction industry.
Energy costs for construction shot up by 53.3% during this same period — and 36.3% since December last year — owing to the ongoing war in Ukraine. But just as damaging is the increase in steel prices, which climbed 42.9% year-over-year through March.
Impacts of Current Construction Costs on Affordability in Housing
It’s no surprise that these increases are significantly impacting affordable housing, regardless of market or property size. While market-rate multifamily developments can respond to higher costs by increasing rents, affordable assets — particularly those backed with HUD-insured loans — have much less flexibility to do so. And, what’s more, rents for ongoing developments are generally set well in advance, meaning these additional expenses aren’t factored in.
As a result, development activity for affordable housing is slowing. The National Association of Home Builders reported in February that multifamily construction starts declined 0.8% in January. And while it’s impacting nearly all regions in some way, the Midwest in particular noted a 37.7% decrease.
The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases, combined with all other aforementioned factors, have stalled many projects. Timber, the article notes, last year hit a price three times greater than the pre-pandemic high.
As a result, even many of those projects approved to receive tax credits through the LIHTC program have been forced to hit the brakes. Even with these credits, developers say, many projects are no longer financially viable.
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Possible Solutions for the Affordable Housing Sector
Few short-term solutions seem to be apparent for affordable housing developers and general contractors. The NAHB is calling on the U.S. government to remove tariffs on timber, while also pushing for career programs to encourage and prepare future construction workers. Additionally, the association is lobbying Congress to pass the Ocean Shipping Reform Act, which the group posits would drastically help reduce supply-chain bottlenecks that further drive costs up while slowing construction down.
The Pew article discusses another possible avenue to ease the pain of rising costs — utilizing some of the billions of dollars earmarked for COVID purposes to deepen the pockets of LIHTC programs across the country. A bill proposing to do exactly this, named the LIFELINE Act, was introduced to the House of Representatives in mid-March and awaits action at the committee level.
Related Questions
What are the most common challenges associated with rising construction costs and affordable housing?
The most common challenges associated with rising construction costs and affordable housing are increased costs for materials, labor, and transportation, as well as supply-chain bottlenecks. These increases are significantly impacting affordable housing, regardless of market or property size. Market-rate multifamily developments can respond to higher costs by increasing rents, but affordable assets — particularly those backed with HUD-insured loans — have much less flexibility to do so. As a result, development activity for affordable housing is slowing, as reported by the National Association of Home Builders in February. Additionally, timber costs have hit a price three times greater than the pre-pandemic high, as reported by The Pew Charitable Trusts in late April. This has caused many projects approved to receive tax credits through the LIHTC program to hit the brakes, as they are no longer financially viable.
How can developers mitigate the impact of rising construction costs on affordable housing?
Developers can mitigate the impact of rising construction costs on affordable housing in a few ways. The National Association of Home Builders (NAHB) is calling on the U.S. government to remove tariffs on timber, while also pushing for career programs to encourage and prepare future construction workers. Additionally, the association is lobbying Congress to pass the Ocean Shipping Reform Act, which the group posits would drastically help reduce supply-chain bottlenecks that further drive costs up while slowing construction down.
The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases, combined with all other aforementioned factors, have stalled many projects. Timber, the article notes, last year hit a price three times greater than the pre-pandemic high.
Another possible avenue to ease the pain of rising costs is utilizing some of the billions of dollars earmarked for COVID purposes to deepen the pockets of Low-Income Housing Tax Credit (LIHTC) programs across the country. A bill proposing to do exactly this, named the LIFELINE Act, was introduced to the House of Representatives in mid-March and awaits action at the committee level.
What strategies can be used to increase the availability of affordable housing in the face of rising construction costs?
The National Association of Home Builders (NAHB) is calling on the U.S. government to remove tariffs on timber, while also pushing for career programs to encourage and prepare future construction workers. Additionally, the association is lobbying Congress to pass the Ocean Shipping Reform Act, which the group posits would drastically help reduce supply-chain bottlenecks that further drive costs up while slowing construction down.
The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases, combined with all other aforementioned factors, have stalled many projects. Timber, the article notes, last year hit a price three times greater than the pre-pandemic high.
A bill proposing to utilize some of the billions of dollars earmarked for COVID purposes to deepen the pockets of Low-Income Housing Tax Credit (LIHTC) programs across the country, named the LIFELINE Act, was introduced to the House of Representatives in mid-March and awaits action at the committee level.
Utilizing LIHTC programs and other government-backed loan products, such as HUD-insured loans, can help increase the availability of affordable housing in the face of rising construction costs.
What are the potential long-term effects of rising construction costs on affordable housing?
The long-term effects of rising construction costs on affordable housing are difficult to predict, but could include a decrease in the number of affordable housing projects, an increase in the cost of rent, and a decrease in the availability of affordable housing.
The National Association of Home Builders reported in February that multifamily construction starts declined 0.8% in January. The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases have had on affordable housing projects. Additionally, the National Association of Home Builders is calling on the U.S. government to remove tariffs on timber, while also pushing for career programs to encourage and prepare future construction workers.
The LIFELINE Act, a bill proposing to use some of the billions of dollars earmarked for COVID purposes to deepen the pockets of LIHTC programs across the country, was introduced to the House of Representatives in mid-March and awaits action at the committee level.
What are the most effective ways to finance affordable housing projects in the face of rising construction costs?
The most effective ways to finance affordable housing projects in the face of rising construction costs are to remove tariffs on timber, pass the Ocean Shipping Reform Act, and utilize some of the billions of dollars earmarked for COVID purposes to deepen the pockets of LIHTC programs across the country. The National Association of Home Builders is calling on the U.S. government to remove tariffs on timber, while also pushing for career programs to encourage and prepare future construction workers. Additionally, the association is lobbying Congress to pass the Ocean Shipping Reform Act, which the group posits would drastically help reduce supply-chain bottlenecks that further drive costs up while slowing construction down. The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases, combined with all other aforementioned factors, have stalled many projects. A bill proposing to utilize some of the billions of dollars earmarked for COVID purposes to deepen the pockets of LIHTC programs across the country, named the LIFELINE Act, was introduced to the House of Representatives in mid-March and awaits action at the committee level.
How can local governments help to ensure the availability of affordable housing in the face of rising construction costs?
Local governments can help to ensure the availability of affordable housing in the face of rising construction costs by providing additional funding for projects through the Low-Income Housing Tax Credit (LIHTC) program. The LIHTC program provides tax credits to developers of affordable housing projects, which can help to offset the costs of construction. Additionally, local governments can lobby the U.S. government to remove tariffs on timber, pass the Ocean Shipping Reform Act, and provide career programs to encourage and prepare future construction workers. The Pew Charitable Trusts published a piece in late April highlighting the impact that timber cost increases, combined with all other aforementioned factors, have stalled many projects.