Why is New Housing So Expensive?

Minneapolis needs more homes. That idea is one of the core tenets of the Minneapolis 2040 Comprehensive Plan. For a number of reasons (demographic, economic, cultural, etc.), more people are, and soon will be, living in the city. We need enough homes for everyone who is choosing to live here, or we’ll continue to see people with more money pushing the most vulnerable among us out of the city we all enjoy.

Bring up the topic of housing to just about anyone and one of the first things you’ll hear is that we need more affordable homes, and that’s absolutely true. “These new homes are too expensive!” is a common phrase you’ll hear across the city and the metro area.

What makes it so difficult to build affordable homes of all shapes and sizes? It turns out that building new homes is Very Expensive.

Since private developers keep their costs and finances private, we can best learn about the cost of multi-family housing through public records. Home builders who are applying for affordable housing funds through the City of Minneapolis are required to submit documentation that includes building cost estimates. Let’s take a look at some recently-built affordable homes and see what it costs.

Hawthorne EcoVillage Apartments is one of the larger affordable housing projects built recently, with a total of 75 units. In addition to being affordable for a family of four making less than $40,000, this building features amenities like patios for grilling, and community and fitness rooms and very expensive underground parking, something that typically costs $30,000-$55,000 per car stall (the city estimates $55,000 – see page 5). Approximately 65 off-street parking spaces were part of this project, which likely raised the overall construction cost by close to two million dollars.

Hawthorne EcoVillage

New affordable housing in Minneapolis, Hawthorne EcoVillage.

So this isn’t just a cheap, shabby building designed on the back of a napkin. An application for funds submitted to the City of Minneapolis estimates the total cost at over $17 million, and puts the total cost per unit at $234,752. Per Finance & Commerce, the developer required financing from at least 12 funders:

Associated Bank, the City of Minneapolis, Dougherty Mortgage, the Federal Home Loan Bank, the Hawthorne Neighborhood Council, the Home Depot Foundation, HUD, the Metropolitan Council, Hennepin County, the Minnesota Housing Finance Agency, the Mississippi Watershed Management Organization and the National Equity Fund.

MPR reports that “about half” of the building’s cost was financed by the city, and that rents will range from $670 to $995 per month. So for those of you doing math at home, the city covered about $8 million dollars to create 75 units, which averages to over $100,000 per unit. This money is spent to keep rents low in new affordable housing.

Maya Commons is the upcoming affordable housing being proposed at the Bunge Tower location (which suffered a fire recently). New construction for 50 homes is estimated to cost $14,328,758, or about $243,435 per unit (the final figure is actually a little higher). The developer applied for and received the maximum amount available under the city’s Affordable Housing Trust Fund (AHTF), which is $25,000 per home. 42 of these 50 homes will be available to those making 50% or less of the Area Median Income (AMI).

Additional projects receiving funding from the Minneapolis AHTF in 2017 are in line with these overall housing costs as well. Minnehaha Commons will feature 43 studios affordable to those making less than 50% of AMI with a cost of $251,672 per unit.

Only one new affordable housing project funded in 2017 has a cost per unit below $200,000: 3601 Nicollet, which features 80 homes and 15 parking spaces ($147,380 per unit). Building parking is expensive, and the this cost (parking is required for most new housing) is passed on to new tenants in the form of rent.

The high costs of new housing also hold true among other affordable projects. New “workforce housing” proposed near Lyndale and Lake Street will cost an estimated $24 million and provide 128 apartments (roughly $187,500 per home). And that’s not including the cost of the land, which the developer already purchased for $1.8 million and would push the total cost per home to over $200,000.

Why does affordable housing cost so much? Well, it’s because housing costs a lot. Labor costs  are expensive, materials are expensive, and land is expensive. Even if homes are built without “upgrades,” the design and construction of new habitable structures (along with basic necessities like windows, flooring, hardware, cupboards, appliances) adds up very quickly. In the context of all those basic “needs” pieces, the incremental cost of “wants” like granite countertops and stainless steel appliances are a small fraction of the total cost.


The bottom line is that it’s very difficult to build affordable housing if the cost to build just one new home is between $200,000 and $250,000. In a previous post, I mentioned that borrowing money is so expensive that owning a home is out of reach for many. For any developer, borrowing money is expensive too, and getting low-or-deferred interest loans are how they can afford to build anything and keep rents low.

Mortgage Cost Breakdown, $200,000 Loan

Mortgage Cost Breakdown, $200,000 Loan. Remove the Mortgage Insurance ($136/mo) and add utility costs, and any developer will have a hard time charging affordable rent for a new home.

So what can we do to make new housing affordable? Two things! On one side, we can take steps to lower the cost of building. Allowing more families to live on one piece of land (whether that’s larger buildings or missing-middle style fourplexes) spreads the high cost of land among the many people who want to live somewhere. Reducing parking requirements (or establishing parking maximums) keeps costs down significantly and focuses new construction on homes for people and not on storage for cars.

On the other side, we can subsidize more housing. That will take far more than we’ve been spending over the past few years. While the affordable housing trust fund has spent around $10 million per year, far more is needed to help subsidize new homes. Jacob Frey has proposed spending $50 million per year on affordable housing, though it should be noted not all that money will help subsidize new construction.

The reality is we need to do both.

If we want new homes to be affordable, it’s time to prioritize that through the city’s budget. Of course, there is more to creating an affordable city than subsidizing new construction. Many of the affordable homes we have today are affordable as a result of age, and building new homes (whether subsidized or not) helps prevent displacement today:

More Homes = Less Displacement

Building more homes leads to less displacement for current residents.

Over the long term, the best way to combat high housing costs is to ensure we have abundant homes at all price points. We need to plan for the future by getting ahead today. That means allowing private developers to build more homes. It means subsidizing affordable and public housing to provide homes for people with low incomes. The Minneapolis 2040 plan does both as part of its affordable housing goal, by a) proposing a loosening of restrictions on where multifamily units can be built, and b) encouraging additional policies and tools to produce new affordable housing. By allowing new homes to be built across the city, while creating an opportunity for everyone to live here, we can build a more equitable Minneapolis.

Anton Schieffer

About Anton Schieffer

Anton lives in Minneapolis and writes about information technology, government transparency, and local housing issues. He mostly wants to build enough housing so that everyone has a place to live.

20 thoughts on “Why is New Housing So Expensive?

  1. Tom Quinn

    I’ve commented on this before and have more detail in other thread, but I find it hard to accept that the monthly payment for a house is much different today than it was 35 years ago when adjusted for inflation.

    My first house, a bungalow in the Mac-Groveland neighborhood of St. Paul, cost $60,000 35 years ago and I had a monthly payment of about $600 (including taxes, MIP, but not homeowners insurance). That is equivalent to $1400/month in today’s dollars after adjusting for inflation which is about what that house would cost today.

    The house itself may cost more, but the interest rates are so low these days it evens things out.

    If there is something wrong with my analysis, please point it out.

    1. Adam MillerAdam Miller

      Interest rates were in a big spike in the early 1980s (while Paul Volker was killing inflation), so yes, that was a particularly expensive to buy a house, but rates also haven’t been at those levels ever since.

      Regardless, if the random website I used to convert 1983’s $60,000 to 2018 is correct, that’s about $152,000 in today’s dollars. I don’t know St. Paul real estate, but would guess you can’t buy the house for that today.

      According to a different random internet calculator, you’d have to be able to get the house for about $215,000 to keep the total payment about $1,400 (payment, taxes and insurance). That sounds low to me too.

      I was going to say that it sounds like your observation really only applies to a the relatively short period of the Volker Disinflation, but I went to look for data (https://fred.stlouisfed.org/graph/?g=khg9). Turns out that mortgage rates did have a big spike during that time period but also remained quite a bit higher than today’s really all through the 1990s. Having done all my home buying after that, I didn’t realize that.

    2. Bruce BrunnerBruce Brunner

      Putting details to Chris Moseng’s point of the major flaw of your argument which is you can’t find a SFH in that neighborhood for the $200,000 that correlates to the $1,400/month payment that comes with that purchase price. Looking at that same neighborhood would cause you to spend at a minimum $300,000 – at that price/appropriate tax assessment, you would have a payment closer to $2200/month with PITI. That’s 50% more in housing cost than your inflation adjusted $600/month from 1980’s so it does show that housing costs have really gone up.

      1. Tom Quinn

        Actually, my old house did go on the market last February and was listed for $280,000. Assuming a $250,000 loan at 4.34%, the monthly payment for the mortgage itself is $1,230 according to Lending Tree. This would bring the article’s example monthly payment to $1,630. And $600 35 years ago is really $1515 today.

        The $115 difference is negligible.

        However, property taxes have exploded over the years and that will make the house less affordable.

        Rents are another matter. The rent I used to pay on my old Fairmount apartment is much higher today relatively speaking.

        1. Christa MChris Moseng

          I mean, not to belabor the point, but $280,000 last Feb is $300,000 today if you factor in the 7% increases in the rest of the market experienced… If it sold for list price and not over list price like my place did.

          I think the simpler answer is really just to put it this way: when housing prices and the CPI rise at the same rate, all increases can be attributed entirely to inflation. But that hasn’t been the case recently in this market, *and* housing policy is goosed to generally cause housing to rise faster than CPI in desirable markets where new housing isn’t being built fast enough. There, owners get inflation PLUS windfall.

          1. Morgan Zehner

            Everyone that uses inflation to compare historical housing costs needs to remember that housing, like education and medical care, and unlike consumer goods, is non-tradeable.

            Consumers have benefited GREATLY from globalization in that it has kept consumer goods prices, including food, relatively low for the past quarter century or so.

            Land is not tradeable and the labor (lots of it) that is required to improve land is not tradeable either.

            A typical CPI is a poor measure to compare housing prices because the Twin Cities cannot easily import land and construction workers from China like it can t-shirts, televisions and car parts.

  2. Parker

    I think it’s important to be careful when we talk about total development cost. For example, the Lupe project in the F&C link talks about a $24,000,000 building. That may not include soft costs, which also tend to be higher on affordable deals.

    Also, the low per-unit cost at 3601 Nicollet – in addition to the low parking ratio you mentioned – is partly due to the fact that it’s all micro-units. On a per-square-foot basis, it’s probably among the most expensive projects here.

    1. Bill LindekeBill Lindeke

      Do you have a sense of the cost breakdowns for those projects that might create a difference? Like, what specifically are the “soft costs”?

  3. Bruce BrunnerBruce Brunner

    This is a well researched and relevant article considering how many people blame developers/builders of housing as opportunistic during discussions of the comp 2040 plan.

    These costs are real and it’s expensive to build any new construction. Luckily, ADU’s, duplexes, triplexes and fourplex are more affordable than large apartment complexes or single family homes that seem to be the only option due to zoning restrictions and exclusionary policies of the past 4 decades.

  4. Faith

    I just read an article that said that construction cost inflation is running at a projected 8% this year instead of the 3-4% a year of previous years mostly due to tariffs. EcoVillage ended up costing just over $18 million or $240,000 per unit. It started construction in 2016, so if you add 3% inflation for last year plus 8% for this year, the same project would cost $267,000 per unit if it broke ground in 2019.

    Until the Affordable Housing Trust Fund cap of $25,000 per unit is lifted, Minneapolis will see mostly new affordable micro, studio and 1 BR units even though the greatest demand is for 2 and 3 bedroom units.

    1. Christa MChris Moseng

      I wonder if there’s a way to shift from a per-unit hard cap to one that takes into account per-bedroom and provides slightly more for 2- and 3-br units… Maybe with a % limit to ensure recipients build each in a desirable proportion.

  5. Josh

    Finding 3 bedrooms in anything built in the last 10 years is basically impossible.

    We always talk about the luxury of today becoming the naturally occurring affordable housing of 40 years from now – and that’s true – but the supply of housing for families over 1-3 people is not increasing.

    This statement is also aware of the shrinking household size but still.

    1. Janne

      A lot of older housing that is rented by individuals has multiple bedrooms. My home has two 3-bedroom units, and only once in the past 22 years has even one of those units housed a family (this family has one child) rather than multiple roommates sharing the cost of the apartment. If we build enough studio and one-bedroom apartments, I suspect most of them would choose living alone over with roommates, if it were close to the same price. That would open up my apartments to families who need more space, and because it’s 115 years old it’s more affordable than new rental housing of the same size can be.

  6. Walker AngellWalker Angell

    Expensive and Affordable are both quite relative terms? What is affordable to Family A who have $40k/yr income, walk or ride bicycles for their transportation, prepare and eat healthy meals at home and rarely miss work because of illness may be completely unaffordable to identical Family B who with their $40k/yr income have the extra (large) expenses of a car or two, eat out at McDonalds, and then miss a fair bit of work because of poor health.

    Regardless of the expense of individual pieces like housing, what can we do to make life overall affordable and sustainable long term?

  7. Carol Becker

    The problem with your first point, about being able to share land cost among four units instead of one means demolishing existing housing. Doing so means your costs have to include the purchase price of that existing housing, which drives costs up.

    Also, if you take a single family house with a mom, dad and two kids and demolish it and replace it with four micro units occupied by four single people, have you actually moved anything forward?

    1. Roda

      Here in south Minneapolis we have a lot of sfh with only one or two people living in them and a lot of empty lots. Also a lot of very tiny houses at the back of lots that used to have a bigger house in front. We lose housing all the time and much of it is not replaced. Houses burn down, get condemned, have trees fall on them – why do you assume livable non micro sized single families would be what’s replaced?

  8. Shaina Brassard

    Something missing in this article but ripe for another article is a comparison of average per unit affordable housing development cost versus similarly sized market rate per unit costs. I know from my work that AFFORDABLE HOUSING IS MORE EXPENSIVE TO BUILD PER UNIT in absolute dollars. I would guess by at least 30%. There are a lot of reasons for this. Requiring 17 sources of funding drives up development soft costs for sure, but there’s more too. It’s something we should understand if we are to be informed housing advocates. (I support new LIHTC affordable housing construction, but it is not at all 100% virtuous and will not solve everything.)

    It may make more sense to also subsidize (but at a lot lower level) market rate housing development in middle income and low income neighborhoods to get the results we want as fast and efficiently as we want: more housing to stabilize the supply vs demand imbalance. A lot of research, like Anton’s graph, has shown that housing is a regional market that responds to changes in supply that will benefit all. We need to make smart investments, not just ones that make us feel good about our role in the plight of the less fortunate. My self interest as a renter and tax-payer behoove me to care about substance, not just image.

    Housing is not the only issue and the city has finite resources. I want more money for small business development and support, job training and placement, public realm enhancements, mass transit, and active transportation infrastructure in poor neighborhoods. I’d want us to use subsidy smartly. So yes, barriers to housing creation must be removed.

    1. rosa

      How would a person not in the industry even find out development costs for different kinds and sizes of multi unit housing?

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