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.