Boston Fed Economist: Construction Cost Stagnation Blocks Affordable Housing Starts
If construction productivity has not improved in decades while costs have risen, federal and municipal housing supply targets may be structurally unachievable regardless of zoning or rate relief.
Construction cost inflation, not mortgage rates or zoning restrictions alone, is the primary barrier preventing new affordable housing projects from reaching completion in the United States, according to research cited by Paul Willen, Principal Economist and Policy Advisor at the Federal Reserve Bank of Boston. Willen made the remarks in an interview published November 13, 2026, by Bloomberg.
Willen stated that many housing projects have already cleared the regulatory and zoning approval process but remain financially unworkable because construction costs have risen to a point where the math of affordable development no longer closes. The specific dollar figures underlying that claim were not disclosed in the Bloomberg segment; a full review of the underlying research would be required to verify the precise cost thresholds cited.
The core finding Willen referenced is that construction sector productivity has remained largely flat for decades, even as productivity across the broader US economy has increased. The Bureau of Labor Statistics tracks multifactor productivity by industry. Its data for the construction sector has historically shown little to no cumulative productivity growth since the 1960s, a pattern that economists have documented in peer-reviewed literature and in Federal Reserve working papers.
The practical consequence, as Willen described it, is that the construction industry has not developed the efficiency gains needed to offset rising material and labor costs. Where other sectors have used technology or process improvement to deliver more output per worker hour, residential and commercial construction has not replicated that dynamic at scale.
Material costs have been a documented pressure point. The US Census Bureau's Construction Price Indexes and the Associated General Contractors of America have both tracked significant increases in the cost of lumber, concrete, steel, and labor since 2020. The Producer Price Index for inputs to residential construction, published monthly by the Bureau of Labor Statistics, remained elevated through 2025 relative to pre-pandemic baselines.
The affordable housing segment faces a compounding problem. Projects designated as affordable, whether through Low Income Housing Tax Credit programs administered by the IRS or through local inclusionary zoning mandates, are typically required to charge rents below market rate. When construction costs rise but allowable rents are capped, the gap between project cost and viable revenue expands, making financing from private lenders and equity investors difficult to secure.
The National Low Income Housing Coalition has reported for several consecutive years that the United States faces a shortage of affordable rental units for extremely low income households. Its 2025 Gap Report estimated a shortage of approximately 7.3 million affordable and available rental homes for the lowest income renters, though that figure reflects both supply constraints and income-side factors and should not be interpreted as attributable to construction costs alone.
Federal legislative responses have included periodic expansions of the Low Income Housing Tax Credit and proposals to fund additional grants through the Department of Housing and Urban Development. The effectiveness of those measures is constrained if the underlying cost of building a unit continues to rise faster than the subsidies offset it, a dynamic Willen's remarks implicitly address.
The Federal Reserve's interest rate cycle adds a separate layer. Higher borrowing costs since 2022 have increased the cost of construction financing for developers. The Federal Open Market Committee has moved rates in both directions over the past two years, and the Chicago Fed's president called for further rate action as recently as this week, as reported by The Congressional Times. Rate relief, if it comes, would reduce financing costs but would not address the underlying productivity gap Willen identified.
What Willen's framing suggests is that the housing affordability debate may need to expand beyond the two most frequently cited levers, rate cuts and zoning reform, to include direct policy intervention on construction costs and productivity. What specific interventions the Boston Fed is studying or recommending beyond the interview segment is not stated publicly. A full working paper from the Federal Reserve Bank of Boston would provide the data and policy proposals behind the remarks.