8 minute read 09 December 2022

There's a dearth of affordable housing in the United States

How US real estate developers can balance profit with purpose and narrow the supply-demand gap

Aaron Craft

Aaron Craft

United States

Taylor Rihl

Taylor Rihl

United States

Tim Coy

Tim Coy

United States

The right to a clean, affordable, and safe place to live has become out of reach for many Americans. Only 42% of new and existing homes sold at the end of July 2022 were affordable to families earning the US median income—the lowest point in nearly seven years.1

With the recent surge in borrowing costs, homeownership has become unattainable for many. And despite recent incentives and mortgage rate buydowns in new-home development,2 two decades of mismatched growth patterns continue to strain US home buyers. Home prices increased, on average, by 6% annually since 2000, while household incomes increased by less than 1% annually over the same period (figure 1). With 30-year mortgage rates around 7% at the beginning of November,3 estimates suggest that over 100 million households (just above 80% of all US households) are unable to afford a median-priced new home.4

Is the US real estate industry investing enough in affordable housing?

In October 2022, the Deloitte Center for Financial Services surveyed more than 200 C-suite executives or their direct reports at US homebuilders and construction firms to understand how current marketplace conditions and lingering pandemic-related challenges will likely impact their decision-making over the next 12 to 18 months.5 We also asked what would incentivize them to build more affordable housing. Respondents included market-rate developers as well as those who have participated in the development, construction, or rehabilitation of affordable single-family or multifamily housing units since early 2020.

But any discussion about what developers could do cannot ignore what stakeholders increasingly expect them to do. Deloitte recently published a series of articles exploring how financial services firms can help create a more financially inclusive future by “balancing shareholder expectations for financial returns with societal, customer, and workforce expectations for ‘a higher bottom line’6—one that commits to a purpose beyond profitability.”

As part of this effort, Deloitte surveyed more than 300 C-suite and senior leaders across financial services firms in the fall of 2021. Results revealed an industry largely committed to achieving purpose-driven financial inclusion.7 More than three in four respondents “consider financial inclusion to be a core pillar of their overall corporate social purpose strategy.” Among these firms, the survey showed underserved and unserved customers (figure 2) ranked second and third as top financial inclusion priorities, both of which describe would-be homeowners who, so far, have been priced out of the US housing market.

Challenges and roadblocks: What’s behind the affordability gap?

In the United States, homebuying at affordable levels has become less and less attainable. While economic uncertainty and rising interest rates have lowered demand, prices remain elevated due to an undersupply of new units, pandemic-era construction delays, shortages of materials and labor, and supply chain bottlenecks.8

When asked about top concerns over the next 18 months, survey respondents point to rising inflation, construction and labor shortages, and supply chain disruptions and delays. Respondents that primarily serve the western United States most overwhelmingly identified rising inflation and the economic impact of the pandemic compared to their counterparts in other regions.

These identified disruptions underscore existing challenges developers face in adding more affordable product to available housing inventory. Thirty-three percent of respondents say high construction costs are the primary reason why they haven’t yet developed, built, or rehabilitated affordable units.

Respondents identified the following obstacles as factors that could most limit affordable housing development (figure 3): cost of labor/materials/land (35%), financing issues (31%), development fees (28%), and taxes (28%). Respondents from the West were more concerned about financing issues and developer capital compared to other regions, mentioning they could limit production substantially.

Bridging the affordability gap: Respondent ideas and practices

Respondents identified a few methods they are using to bridge the gap between new supply and demand. These include:

1. Integrating affordable housing into multi-use spaces. Almost 26% of respondents who have developed or rehabilitated affordable housing units since early 2020 are integrating other property formats such as office and retail spaces into their affordable housing projects, leveraging favorable zoning, tax incentives, and rent subsidies of multiuse commercial projects.

2. Adding affordable units onto existing properties. Almost 25% of respondents are expanding their projects by building additional dwelling units on their properties.

3. Finding affordable housing–friendly areas. Local engagement also continues to play a key role. Just under 24% of respondents who developed or rehabilitated affordable housing units since early 2020 say they have started conducting operations in more affordable housing-friendly municipalities.

4. Offsetting rising costs with incentives. Incentives such as expedited preconstruction approval processes, reduced fees, and financing programs can help bring more affordable supply to the marketplace. Twenty-four percent of the respondents who have developed or rehabilitated affordable housing units since the beginning of 2020 believe that fee reductions or financing programs can be some of the most beneficial tools to increase affordable housing supply (figure 4). Nearly 22% of respondents believe that interventions such as reduced minimum lot sizes and expedited building permit processes can make creating more affordable units more feasible.

Making ends meet: Innovating and partnering to jumpstart progress

Gleaned from the survey and analysis, following are some ideas developers should consider:

1. Integrating market-rate housing with other residential formats. This could include building nontraditional units such as microunits and coliving developments, which can accommodate two to three times as many households and command higher rent per square foot.9

2. Find ways to reduce materials costs. Developers can focus on manufactured construction techniques or use prefabricated materials, which can often lower materials costs.10

3. Explore alternative products to traditional units. For example, they can convert old motels into affordable housing or develop build-to-rent communities and manage them like a multifamily facility. In California, for instance, the state’s US$800 million Homekey program created the fastest expansion of supportive housing in modern state history. It converted 94 hotel properties into 6,000 new housing units for more than 8,000 people at nearly half the cost per unit for new development.11

4. Partner with municipalities in new ways. Developers should take advantage of incentives, look for opportunities outside of core locations, and continue to work with municipalities to promote projects with mixed-use development and repurposing older assets to include affordable units. Developers can educate municipalities on which incentives and changes in regulations would make it more achievable for them to build housing. Examples include transit-oriented development along key public transit systems and building in nontraditional mixed-use spaces (i.e., residential units above hotel, retail, or life sciences spaces).

5. Partner with other financial services firms and fintechs. Real estate developers can also partner with allies to help solve the housing affordability crisis, including banks or other emerging fintech solutions. These entities could be integral in promoting and offering products specific to affordable projects by providing more favorable terms. For example:

a. Bank of America recently introduced their Community Affordable Loan Solution, offering no down payment and no closing-cost mortgage advances to widen access to homeownership, especially to minority communities.12

b. US Bancorp announced their US$100 billion community benefits plan, increasing mortgage lending units by 20% and increasing investments in community development and affordable housing, among other initiatives.13

c. Home-equity investment providers like Point or HomePace plan to provide nontraditional financing to give buyers better access: fronting money for unattainable down payments in return for a future share in their home’s appreciation. The new owners could then buy back their equity at a later date.14

6. Consider end-user expectations. Developers should be mindful of end user expectations as they are seeking out home offices, garages, or space for a pet. Affordable housing occupiers look for different amenities than a market rate occupier such as location to public transit or multigenerational flex spaces (see sidebar).15

End user needs and preferences have shifted

All the while, developers need to ensure their products fulfill the evolving expectations of end users. The pandemic highlighted the need for improved locational flexibility and accessibility to local necessities such as grocery stores, health care facilities, and schools. Although almost half of respondents say they have not made major changes to their development plans, many have made adjustments in line with evolving user expectations. Almost 30% of the respondents say they are now building in proximity to essentials, while 21% indicate that upcoming projects are more easily accessible by public transportation (figure 5). Developers are also including additional storage and private outdoor spaces (patios, decks, balconies, and/or backyards).

Investing in the future can create dividends beyond just profitability

As a real estate industry, developers and homebuilders have an opportunity to innovate and bring new cutting-edge solutions to the market. From an economic perspective, if people can find affordable housing, it can free up additional discretionary income in their budgets to save and upgrade their living situation over time. Investments in affordable housing today can create growing future demand for higher-end supply as personal wealth accumulates. This should be considered in developers’ long-term strategic plans. Through the use of technology, creative zoning and product types, and partnering with other allies such as local municipalities and banks, the industry sits at an inflection point as to how it adapts to the need for affordable housing.

Building affordable housing also represents a social issue for the homebuilder and developer community that often requires swift action with intentional solutions. The industry can act to help millions of Americans find homes that meet their evolving needs at price points that they can afford.

Creating affordable housing can drive vibrant, diverse communities that make neighborhoods more attractive over time. A place to live is much more than a house—it’s a home. Developers have a golden opportunity to create homes for millions of Americans, with an even bigger opportunity to leave a legacy for the industry.

  1. NAHB, “NAHB/Wells Fargo housing opportunity index (HOI),” accessed November 21, 2022.

    View in Article
  2. Brooklee Han, “Mortgage buydowns on the rise as builders try to entice more buyers,” Housing Wire, November 16, 2022.

    View in Article
  3. Rachel Siegel and Kathy Orton, “Mortgage rates rise above 7 percent as Fed scrambles to slow economy,” Washington Post, October 27, 2022.

    View in Article
  4. NAHB, “NAHB priced-out estimates for 2022: Table 4,” February 2022.

    View in Article
  5. Respondents were grouped into geographic regions based on their primary US areas of focus:

    • West (AK, AZ, CA, CO, HI, ID, MT, NM, NV, OR, UT, WA, WY)
    • Southeast (AL, FL, GA, KY, NC, SC, TN, VA, WV)
    • Northeast (CT, DC, DE, MA, MD, ME, NH, NJ, NY, RI, PA, VT)
    • South Central (TX, OK, MO, MS, LA, AR, KS)
    • Midwest (IA, IL, IN, MI, MN, NE, ND, OH, SD, WI)
    View in Article
  6. Monica O’Reilly et al., A higher bottom line: The future of financial services, Deloitte, March 2021.

    View in Article
  7. Courtney Davis, Accelerating toward financial inclusion: Stronger together, Deloitte Insights, September 28, 2021.

    View in Article
  8. Economist, “How long can the global housing boom last,” January 8, 2022.

    View in Article
  9. Susan Tjarksen, “Coliving during Covid-19,” Cushman & Wakefield, November 12, 2020.

    View in Article
  10. Rebecca Picciotto, “Demand for prefabricated apartments climbs as costs balloon for multifamily development,” Wall Street Journal, October 18, 2022.

    View in Article
  11. Camille Squires, “Why California succeeded—and New York failed—at turning hotels into affordable housing,” Quartz, March 29, 2022.

    View in Article
  12. Bank of America, “Bank of America introduces Community Affordable Loan Solution™ to expand homeownership opportunities in Black/African American and Hispanic-Latino communities,” press release, August 30, 2022.

    View in Article
  13. US Bank, “US Bancorp announces $100 billion community benefits plan,” May 9, 2022.

    View in Article
  14. James Rodriguez, “Homebuyers battling high mortgage rates could soon have a new option: sell a stake in their future home for as much as $250,000 toward a down payment,” Business Insider, November 3, 2022.

    View in Article
  15. US Department of Housing and Urban Development, Creating connected communities, June 30, 2014.View in Article

The authors wish to acknowledge Parul Bhargava and Somya Mishra for their extensive contributions to the development of this report. They would also like to thank Renea Burns, Courtney Davis, David Levin, Robin Offutt, Eric Ruben, and Jeff Smith for their insights and guidance.

Cover image by: Natalie Pfaff

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Jeffrey J. Smith

Jeffrey J. Smith

Deloitte & Touche LLP
Renea Burns

Renea Burns

US Real estate eminence leader


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