Why Does Affordable Housing Cost So Much?

A Quick Explainer on the Complex Realities Behind Affordable Housing Development Costs

Affordable housing is a public good, but building it is surprisingly expensive. In many cases, the cost of developing an affordable apartment equals or even exceeds that of a market-rate unit. However, rents are capped based on household income, preventing tenants from paying more. As a result, developers must secure complex, layered financing to make projects possible.

1. Rents Are Regulated and Revenue Is Limited

Affordable housing rents are determined by income levels rather than market rates. For example, a family earning 50% of the Area Median Income might pay $900 per month for a unit that costs over $400,000 to build. Various subsidies are needed to cover the financial gap.

2. Volatile Tax Credits Are the Backbone

The Low-Income Housing Tax Credit (LIHTC) is the largest federal resource for affordable housing. States award tax credits to developers, who sell them to investors for equity. Rising construction costs and declining equity prices (sometimes as low as $0.79 per credit) have weakened the program’s effectiveness, especially for the 9% credits used for new construction.

3. Projects Typically Require Multiple Funders

Developers often need to assemble a “capital stack” consisting of tax credits, loans, grants, and mortgages—usually from five to seven or more sources, each with its own requirements and fees. Securing financing can take 2–3 years, which increases legal fees, holding costs, and project complexity.

4. Tariffs and Global Trade Add Costs

Approximately 7% of housing construction materials are imported. Tariffs on lumber, steel, and other goods, combined with global inflation and supply chain disruptions, have significantly driven up construction costs across the industry.

5. Higher Upfront Costs

Affordable projects include the developer's compensation as part of the development costs, whereas market-rate developers are compensated through the rental or sale of the property. Thus, market-rate expenses may appear lower compared to LIHTC costs.

6. Building for Longevity Costs More

Affordable housing must last for 30+ years. This requirement necessitates using longer-lasting materials (such as masonry facades and stormwater systems) and building adequate repair reserves, front-loading costs to avoid future preservation crises.

7. High Public Standards Raise Expectations

Affordable housing must meet higher standards for accessibility, sustainability, and community compatibility. To receive funding, developers must compete in scoring systems that reward those who serve the lowest-income households (who often require social service supports) and demonstrate readiness to build, which raises both expectations and costs.

8. Prevailing Wage Laws Raise Construction Costs

State-funded projects are required to adhere to prevailing wage laws, which mandate that contractors pay local market rates determined by the Department of Labor and Industries. While these laws help ensure fair compensation for workers, they can also lead to significantly higher construction costs.

Conclusion

Affordable housing isn’t expensive due to waste; it is costly because we demand it meet high standards, serve our most vulnerable neighbors, endure for decades, and navigate a complex and underfunded system. Smarter public investment and streamlined funding are essential to building—and preserving—the homes that our communities need.

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