The evidence is in on a cost-effective way to build affordable apartments

There’s a long-running argument in American politics about whether the private sector or public sector is the most cost-effective delivery system for products and services society needs. New evidence reminds us that, when it comes to creating homes affordable to low-income families, seniors, veterans, and individuals with special needs, this is a false choice.

A new study by Abt Associates and analysis by the National Council of State Housing Agencies (NCSHA) reveals that affordable apartments financed by the Low-Income Housing Tax Credit—commonly referred to as the Housing Credit—cost about the same, on average, to develop as all apartment buildings, despite complying with a host of policy constraints that don’t apply to market-rate developments.

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A federal tax incentive, the Housing Credit finances the vast majority of affordable housing in urban, suburban, and rural areas nationwide, more than 3 million homes over the past 30 years. A public-private partnership, it uses tax dollars to incent an activity that otherwise does not happen while harnessing the entrepreneurial spirit and accountability of the private sector.

The Housing Credit has become the most important funding source for affordable apartment development, with state housing agencies competitively awarding credits to developers, who produce with Credit proceeds rent-restricted apartments for low-income households.

Critics of the Housing Credit have occasionally pointed to isolated examples of developments that seem “too expensive” to develop as evidence that the program is an inefficient way to produce a needed social good. A relative few outliers aside, the data suggest that Housing Credit development is very much in line with multifamily development broadly.

The Abt study is the most comprehensive quantitative analysis of the costs of affordable housing development to date. It draws on a nationwide database of more than 2,500 Housing Credit-financed properties containing more than 160,000 apartments developed between 2011 and 2016.

The study shows that newly constructed Housing Credit-financed apartments cost on average about $209,000 per apartment to develop. This figure includes the cost of construction, land, and fees to contractors and others. This is a national average; costs vary considerably from place to place, like all prices in local real estate markets.

Based on data from Dodge Data and Analytics and Fannie Mae, NCSHA has estimated that the average development cost for all apartments during the same time period was roughly $196,000 to $204,000 per home. (To see the details of our analysis, go to https://www.ncsha.org/resource/cost-study/.)

The slightly higher costs suggested for new construction of Housing Credit developments are likely explained by financing requirements on them that generally do not apply to market-rate apartment developments, such as the need for higher upfront operating reserves and funding to cover the developer’s services.

Market-rate apartments can generate capital to cover these costs by charging higher rents. Housing Credit properties cannot: They must by law serve low-income households at restricted rents. Also, unlike many market-rate apartment developments, Housing Credit properties don’t “trade” every few years for higher prices based on real estate appreciation and operating cash flow.

The evidence also suggests that the cost to develop Housing Credit apartments has grown more slowly in recent years than it has for apartments overall – we believe due in part to sound administration of the program by the states.

The Abt Associates analysis indicates that the costs to develop Housing Credit apartments grew by about 8 percent between 2011 and 2016. A 2017 report from Fannie Mae indicated overall apartment construction costs had risen 10 to 30 percent between 2011 and 2016. (See Fannie Mae, “Fannie Mae Multifamily Market Commentary,” March 2017.)

In other words, the Housing Credit, a public-private partnership, is doing what it is supposed to – producing affordable apartments for people who need them – just as cost effectively as the private sector is in meeting the needs of higher-income renters. At a time of skepticism about government’s role in the housing system, and a false choice about supposedly better alternatives, this is good news for the tax payers – and the millions in America who lack a decent affordable home.

Stockton Williams is executive director of National Council of State Housing Agencies.