Rising building costs could slow down new affordable housing development

The rising cost of lumber and other materials has slowed down housing production just as the nation is starting to reopen from the pandemic. This not only means fewer single-family homes and higher prices for homebuyers. It also means that fewer affordable rental properties will be built just as low-income renters need them the most.

Rental housing costs had been rising even before the pandemic made things worse. The main reason is that there just are not enough affordable rentals for everyone who needs them. According to the National Low-Income Housing Coalition, there are only 37 affordable homes for every 100 extremely low-income renter households. The only way to bring rents back to affordable levels is to produce millions of more affordable rental homes.

As vaccinations increase and the economy reopens, though, new housing production has been slowed by the rising cost of building materials. Most building materials have increased in price because of the pandemic, but the cost of lumber has skyrocketed in recent months. Prices have gone up because producers scaled back operations around the world during the pandemic.

Many lumber mills slowed or shut down operations during the pandemic. However, there was an unexpected wave in home improvement projects during the pandemic, continuing through the current recovery. People were stuck at home, and had money they were not spending going out or traveling. This made the lumber shortage worse.

Lumber prices increased 154.3% in May, as reported by Reuters. In a May survey for the National Association of Home Builders (NAHB), builders of single-family homes reported an average increase of over 26% in the cost of building materials over the last 12 months.

On average, material costs are adding $36,000 to the price of the typical new home. New rental housing is also affected. Builders of multifamily housing are experiencing huge price increases in building materials. 

New rental projects are seeing material price increases add millions of dollars to the cost of construction. Builders are seeing increased lumber costs adding between $1-$2.5 million to projects ranging from about 200 to 400 apartments. One developer in Florida saw a $15,000 per unit increase in lumber prices. This will add $4 million to the price tag of a 289 unit property for low-income seniors.

In many cases, developers faced with these kinds of price increases will delay a project and wait for material costs to come down. This still adds to the price of a project, since construction loan interest, insurance, and other payments still need to be made even when work is halted. Once construction is completed, market rate properties pass these cost increases on to tenants in the form of higher rents.

How does this affect the supply of affordable housing? 

When affordable housing developers have to wait for construction costs to go down, fewer units will be produced. Projects that do manage to get built will face other challenges because of rising building costs.

Because affordable housing developments have restrictions on the amount of rent they can charge, high construction costs can leave them with a long term financial hole. This financial strain shows most clearly through deferred maintenance.

Financially strapped properties may need to put off long-term improvements like replacing a roof or boiler. If emergency repairs are needed, there may not be enough money in project reserves to take care of the problem. Over the long term, deferred maintenance can lead to many serious health and safety issues.

Federal, state, and local government agencies also support affordable housing development. They run funding programs and issue permits. Remote work during the pandemic slowed the permit process around the country, and many agencies remain understaffed because of city revenue shortfalls during the pandemic.

How does this affect low-income renters? Many states and cities raise money for new affordable housing developments through impact fees. These fees are charged to commercial and residential developers when they apply for construction permits. When high-end developments are delayed, there is less local money for new affordable housing properties.

The NAHB survey found that cost increases and labor shortages were hitting the entry level home market hardest. This means that renters who are ready to purchase a modest starter home will have fewer choices. They will pay higher prices even though interest rates are still at historic lows. Many of these first-time homebuyers will decide to keep renting until home prices come down. This will leave fewer vacant units for other low-income renters.