The Impact of Construction Costs on Affordable Housing

Jim Leonard

Much has been made recently of the looming crisis in being able to provide affordable housing. With seemingly endless challenges, add the increases in construction cost over the past few years to the mix.

The challenges are well documented: rising land prices, bureaucratic red tape, impact fees, and other infrastructure costs. While there is a lot of well-founded concern for these issues, the one constant has been the rising cost of construction material and labor. These are market-driven factors, and most people who are on the supply chain side do not differentiate between affordable and market-rate housing. A 2-by-4 is a 2-by-4, and the price is the price. We have watched costs rise with the market steadily over the past few years. We will look at some of the areas where costs have added significantly to the total sales price of a home.

At the top of the list is the labor shortage in our market, which adds cost but also increases cycle time and the total number of days to build a home. In some cases, labor costs are higher in small affordable homes. A home that is required to have all siding and a front porch to fit into an older neighborhood may have a higher cost per square foot to build than a larger home in a new neighborhood. The rationale given to me by a framer is: “I can frame a 3,500-square-foot house on the north side that has no siding, and I can make really good money, or I can frame your 1,100-square-foot home with all siding, which takes as much total time as the larger house.” To compensate for the extra work on a small home, the framer charges a much higher price per square foot to frame it.

This same rationale trickles down to other subs as well. Painters will say about the same thing, pointing out the extra prep time and work for a home that is all siding compared to one with 100-percent masonry. If there is only a small amount of masonry, the cost is higher due to the expense of the mason to drag out scaffolding and supply labor for a small job. It takes them almost as much time to get set up to work as the job itself does.

Many other costs do not change regardless of the size of the home. We pay the same amount for an energy test on a small home as a large home. In fact, the smaller home has a higher chance of failure due to the higher percentage of glass to the overall amount of wall sizes. Plot plans, surveys, lot stakes all cost the same amount. Engineered framing designs, foundation plans, soils testing all cost about the same amount of money. A sidewalk in front of a house is the same cost on a small house as a more expensive one built on the same size lot. Two trees required by the city are the same cost regardless of the price of the home.

More often than not, on an affordable house in the innercity, we spend money cutting open streets to bring water and sewer, and maybe gas to property. In newer communities, these costs are almost never paid. Bringing electricity to the home might mean setting a new utility pole due to the age or size of the existing pole. And the timeframe for CPS to go through the design process for a new utility pole can take up to 16 weeks. So you better get an early start on your project with them. We have paid for a lot of utility poles through CPS. There are private providers who will set a pole for less money, but CPS will not run service to a home from a private pole.

So, what are you actually paying to get utilities to a lot? Water and sewer impact fees run about $6,100 per lot. But wait, there are waivers for that, right? Yes, if you are in line when the city starts its fiscal year on October 1. By October 2 you can just about guarantee that all the waivers for the year will be claimed. The cost of cutting the street and repairing it to connect water and sewer from the mains to the lot run anywhere from $7,000 to $10,000. Setting a utility pole if needed is about $3,000. So even if you acquired the lot for pennies, you could pay almost $20,000 just to have utility service to the property.

When I built my first home in 2011 utilizing the city’s affordable guidelines, the cap on sales prices was $110,000. Today the city recognizes that rising costs have made it impossible to deliver a house at that price. The cap today is $225,000. A doubling of the price in less than a decade. The overall success of our market has created a conundrum to produce affordable homes, and no amount of local government intervention and incentives will change the fact that it is just more expensive to build today than even two years ago.