Why This Matters

The reconciliation legislation Congress passed earlier this month is projected to worsen a range of economic outcomes for low- and moderate-income households and to stretch housing affordability by raising long-term interest rates. In isolation, however, a provision to expand the low-income housing tax credit (LIHTC)—the nation’s main incentive program for low-income housing development—by an estimated $16 billion over the next decade could improve housing affordability for some households. But this provision will significantly affect the housing market only if state and local housing finance agencies (HFAs)—the ultimate allocator of the tax credits to specific projects—change their policies to ensure new resources help build as much as possible, cost-effectively, and where it is needed most.

Key Takeaways

This brief offers four initial ideas for how they can do so.

• First, HFAs should encourage cost controls to yield more housing per dollar, including through limits on total development costs, minimizing non-housing-related requirements, or allocating all new resources based on maximizing housing per credit dollar, with some limited set-asides for certain target populations.
• Second, HFAs should reward projects that employ cost-reducing and time-saving building techniques, such as modular and panelized housing. This could have the effect of seeding new modular factories in places where they are needed.
• Third, HFAs could alleviate the challenge that it is often expensive to build in high-opportunity areas by promoting mixed-income developments that in certain areas can generate sufficient income on market-rate units to cross-subsidize affordable units.
• And finally, HFAs should encourage projects in places with better permitting, zoning, and impact fee policies, which can lead to more housing now and create the conditions for a better-functioning housing market over time.