High building costs, interest rates take a bite out of housing affordability

In a growing state, North Carolina faces a tremendous shortage of affordable homes. (Photo: Clayton Henkel)

Skyrocketing building costs and higher interest rates have made $900 rents a thing of the past, says Sarah Odio, the associate director of housing for the Development Finance Initiative (DFI) within the UNC School of Government.

In the past, Odio said, $900 rents covered money developers borrowed from lenders and equity investors to build affordable housing. Building a housing unit cost $140,000 to $150,000 during that period, Odio said. Now, developers pay $300,000 per housing unit, and interest rates are higher, she said.

“For $900 a month, there’s going to be a funding gap one way or another,” Odio said. “You can’t even do $2,000 a month [rent] without some sort of funding gap. So today, what the market can deliver based on the ability to raise debt and equity is basically rents of about $2,500.”

Odio was a presenter at last week’s 2024 Land of Sky Regional Council WNC Housing Forum in Flat Rock. Her department at the UNC School of Government focuses on real estate development and finance.

The Land of Sky Regional Council works with local governments, the region’s leadership, state and federal agencies, service providers, and volunteers to foster desired social, economic, cultural and ecological conditions in Buncombe, Henderson, Madison and Transylvania Counties. The conference brought together elected officials, developers, realtors, housing experts and others from the region and across the state.

“As a public partner, when you’re wondering why private developers are coming to you [local governments] and saying, we need some help, it’s because the market is not going to deliver this [an adequate supply of affordable housing] on its own today,” Odio said.

The shortage of affordable housing is especially burdensome for extremely low-income households.

The National Low Income Housing Coalition’s (NLIHC) annual report The Gap: A Shortage of Affordable Homes revealed that North Carolina has 326,751 extremely low-income households but only 130,930 affordable rental homes available to them. That means there are 40 affordable and available rental homes for every 100 extremely low-income households in the state.

“Our state and counties’ need for affordable housing isn’t going anywhere. It’s growing,” Stephanie Watkins-Cruz, director of housing policy at the N.C. Housing Coalition said in March after the NLIHC released its report. “But it is disproportionately carried by those earning low or extremely low incomes. And this hurts the health, wealth, and resiliency of our communities. We need greater investment in housing to meet the scale of the true need.”

Nationally, the NLIHC report revealed there are just 34 affordable and available rental homes for every 100 extremely low-income renter households nationwide. As a result, 74% of the nation’s poorest families – seniors, people with disabilities, and low-wage workers – spend more than half of their incomes on rent and utilities, leaving them unable to afford food, transportation, medical care, and other basic necessities.

To provide affordable housing and reduce cost will require public-private partnerships, Odio said. As the housing crisis worsened, more local governments began to come to DFI for help attracting private partners to build housing for low-and moderate-income households, she said.

Subsidies to increase supply

At the Land of Sky Regional conference Watkins-Cruz said boosting the supply of affordable housing is not the “silver bullet” to solve the current crisis.

“You need supply and you need supply to be affordable.” Watkins-Cruz said. “In order for supply to be affordable, because our beloved market is not popping out $100,000 homes naturally, you need subsidy.”

Interventions, policies and programs are also needed to administer those subsidies Watkins-Cruz said. The federal Low-Income Housing Tax Credit (LIHTC) and the land trust models are examples of programs that contribute to supply but also have subsidy as a component, she said.

Under the land trust or shared equity model for homeownership, homes remain affordable for 99-plus years and provides long-term stability for the community. Meanwhile, LIHTC is used to finance about 90 percent of all new affordable housing development. The program does not provide housing subsidies. Instead, the program provides tax incentives, written into the Internal Revenue Code, to encourage developers to create affordable housing.

Adrianne Todman, acting secretary of the U.S. Department of Housing and Urban Development (HUD) told N.C. Newsline this week that Congress recently missed an opportunity to enhance the program that would have netted an additional one million affordable housing units.

“The Senate Republicans decided not to approve it, and so here we are,” Todman said. “It takes leadership, making sure that you have people are in place to get programs like that across the line, but it also takes the resources.”

Todman was in Durham this week to attend a groundbreaking for a new 172-unit mixed-income project called Commerce Street Apartments. The project is the first development supported by the $40 million Choice Neighborhoods Initiative Grant administered by HUD and awarded to DHA and the City of Durham in 2022.

“People need to vote their values, quite frankly,” Todman said when asked how to remove partisanship from housing issues. “For folks like me, in my job, when we have these resources, we need to make sure we’re deploying them in a responsible way.”

Creative solutions to increase affordability

Meanwhile, one of the more practical things a local government can do to help reduce housing costs is to relax zoning requirements and restrictions, Odio said.

“If you don’t allow that extra density, you might make it a little bit more difficult to get the most out of that land, things like parking requirements, if you make a developer have two parking spaces per unit that will cost more, things like height and location, all of that can impact how much it actually costs to build a unit,” Odio said.

Speeding up the development process can also help to reduce costs, she said

“For many communities, this is a huge barrier, which maybe they don’t actually have a planning board in place, maybe they don’t do a lot of development, and so they take their time,” Odio said. “And you hear this a lot, but time is money, because you are accruing interest on the loan that you took out to be able to build.”

Granting developers land subsides is another way to keep properties affordable, Odio said.

“Land is is huge, especially in more expensive areas,” she said.