The US has less affordable housing than it needs, and that’s because of a fundamental problem: the cost of building and operating affordable units adds up to more than what those units bring in in rent. The Urban Institute launched a tool that illustrates this problem first-hand.
The tool, which uses housing data from the Denver area, summarizes the affordable housing problem while explaining the associated layers and technical terms in an intuitive, easy-to-understand manner. At the bottom right, you see a theoretical development whose cost changes based on the variables you, the theoretical developer, are facing.
The unsustainable math behind developing affordable housing
There are many costs that go into building affordable housing units. In developer speak, these costs are referred to as “uses.” Uses include the cost of purchasing the land itself, the cost of construction, and future operating expenses (such as hiring and paying building staff), among other things.
How do developers cover these costs? The uses are funded through various sources such as debt (taking out a loan) and tax credits. However, there are limiting factors when it comes to both of these.
When developers go to take out a loan, the amount they get and the interest they pay is determined based on projections for how much revenue a building’s rent will generate. But it can be tough to predict whether or not a building could wind up being vacant, or for how long. Obviously, if nobody is paying rent on a building a loan helped build, the lender is not going to be happy.
Tax credits can also help developers. There are variables involved in determining the amount of tax credit a builder is eligible for, such as the cost of land and rent prices. Even if a developer is eligible to receive tax credits, there’s no guarantee they’ll actually receive them because the funds are limited at the national, state, and local level.
Closing the gap
To close the gap between the cost of developing affordable housing and the revenue it generates, why don’t developers just apply for bigger loans, increase the amount of units in a building (generating higher rental revenue as a result), or charge more for rent?
As described above, lenders determine the loan amount based on projected revenue, and for affordable housing, that revenue is low by its very nature. Building more unites would also means needing to make sure more unites are filled, and charging more for rent defeats the entire purpose of affordable housing to begin with.
The bottom line is that subsidies are the only way to close the gap between cost and revenue; they’re the only way to build enough affordable housing. Such subsidies can come in varying forms, such as vouchers, more tax credits, and grants.
Emily Badger at the Washington Post sums it up pretty well:
To the extent that government should step in when the private market can’t, affordable housing is a prime example. The larger problem, though, is that we hardly devote the kind of public resources to this market failure that it demands.