Urban Wire How the Federal Government Could Expand Support for Local Housing Production
Yonah Freemark
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Thanks to price increases, inadequate income gains for families with low incomes, and high mortgage interest rates, housing affordability in the United States is now at its lowest level in years—and the number of households spending more than they can afford to rent has reached record highs.

One way to combat rising housing costs is through new housing construction. More housing is associated with lower costs and can help ensure people can stay in the neighborhoods of their choice. But building more housing requires local zoning laws that allow for it, a real estate market with demand for new homes, and, in many cases, adequate public-sector subsidies, particularly to construct housing affordable to families with low and moderate incomes. Unfortunately, construction has not kept up with demand, leaving the nation with millions fewer homes than needed to match growth.

In fiscal year 2023’s federal spending law, Congress introduced a new program that allows the US Department of Housing and Urban Development (HUD) to fund states, metropolitan planning organizations, and localities that are facilitating affordable housing production and preservation. Now the question is: What complementary changes can federal policymakers implement to help meet construction demands?

As part of a German Marshall Fund project to identify best practices to fight the housing construction logjam, I interviewed housing and planning officials in three US cities—Atlanta, St. Louis, and Seattle, each of which is planning major housing projects in development zones they have established near transit lines. Other cities nationwide are planning significant housing growth in zones they’ve identified for dense new construction.

The interviews suggest the federal government could take some key additional steps to further encourage construction.

1. Increasing funds for subsidized affordable housing

The federal government funds subsidized affordable housing—generally designed for households who make 60 percent or less of the median income—through two major approaches:

  • It provides authority to states (and a few cities) to distribute Low-Income Housing Tax Credits. These credits now support several million units nationwide.

The officials I interviewed agreed that limited funds inhibit their ability to support families with the lowest incomes. In Atlanta and St. Louis, the share of local housing units supported through HUD subsidies has declined since 2000. In Seattle, barely 5 percent of all housing is HUD subsidized.

To address this gap, Congress could consider increasing funding for HUD project-based subsidized housing programs specifically for use in dedicated housing production zones, which could incentivize the construction of more affordable units. An additional $1 billion in annual funds for HUD, for example, could provide rental support for about 100,000 more families to reduce their rental burden.

2. Revisit compliance rules that extend timelines and raise expenses

Interviewees emphasized that existing federal rules make it challenging for them to deploy HUD funds. HUD programs involve considerable paperwork and often require compliance with National Environmental Policy Act rules, and some mandate that buildings involved in projects be evaluated for inclusion in the National Register of Historic Places—even if historical preservation had not been considered before for affected buildings. These policies increase project delivery timelines.

Several interviewees also emphasized that these conditions raise expenses. “The unintended consequences of bringing in federal dollars,” one person told me, “is that it could cost us an additional $10 million on a project,” compared with a nonfederally supported project.

To reduce bureaucratic oversight, Congress could authorize a HUD pilot program to minimize project delays. Such a program could enable localities funded through the new housing production program to specify housing development zones that include a minimum percentage of affordable units. For pilot grant recipients, HUD could then minimize or eliminate environmental review and historic preservation requirements for all projects leveraging HUD funding in a specified housing production zone.

3. Streamline program funding regulations

A large share of new tax credit–funded housing projects integrate additional funding from HUD programs, like HOME and Federal Housing Administration loans. This causes its own, similar problems. “It’s messy to line up funds from multiple sources,” one person told me. Another said, “When you get too many federal funds involved, it can kind of grind the funds to a halt because of the bureaucracy of having so many sources of funds involved.”

These situations can increase project difficulty, increase transaction costs, sometimes require multiple applications, force applicants to report on the status of the same project multiple times, and involve inspections from representatives of multiple programs.

In some cases, regulations about using funds vary. Rules related to subrecipients can differ between CDBG and American Rescue Plan Act dollars, while CDBG (PDF) funds cannot be used for new public housing development—even though one of the objectives of the program is the “expansion of the Nation’s housing stock in order to provide a decent home… for all persons, but principally those of low and moderate income.” HOME funds face similar restrictions. But to applicants’ confusion, those same funds can be used for projects involving site assembly or improvements, so integrating multiple sources in a single project can be a headache.

Interviewees also emphasized that certain recent federal programs, such as the State and Local Fiscal Recovery Funds, were easy to use. Many pointed to the federal government’s largely hands-off and flexible approach on their use, which has resulted in a significant share of funds going to affordable housing investments.

To maneuver around these challenges, HUD could consider providing targeted technical assistance to encourage states to layer HUD funds onto their tax credit allocations automatically as part of a unified application for affordable housing financing, with a single deadline and program requirements. This is already done in states like Pennsylvania.

Similarly, HUD could create a pilot program that harmonizes reporting and inspection requirements for all grants in housing development zones. For example, if a city receives public housing, CDBG, and HOME funding for projects in a specific zone, it could report on all the use of all grants under the rules of only one of the three programs. This would reduce the bureaucratic challenge of managing multiple funding sources.

The federal government has some history of such allowances for funding stream harmonization; the Federal Highway Administration, for example, has authorized the use of its funds (PDF) under CDBG guidelines.

4. Providing additional resources for predevelopment investments in planned mixed-income neighborhoods

Interviewees emphasized that one impediment to housing development is inadequate access to predevelopment dollars designed for mixed-income projects. HUD rules sometimes make it difficult to leverage funds for water, sewer, and roadway connections needed in advance of housing construction if projects include market-rate housing.

To speed up construction, the federal government could leverage a portion of its new housing production funds to provide specific predevelopment support in locality-designated development zones incorporating affordable housing units. HUD could simultaneously fast-track recipient use of Section 108 loans, which they can use for neighborhood redevelopment.

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Research Areas Housing
Tags Housing affordability Housing markets Housing stability Housing subsidies Federal housing programs and policies
Policy Centers Metropolitan Housing and Communities Policy Center
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