Urban Wire Lessons from the American Rescue Plan Act to Inform the Proposed $20 Billion Innovation Fund for Housing Expansion
Kathryn Reynolds, Samantha Fu
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Safe, stable shelter is a basic human need, but it is more out of reach than ever. In the US, housing cost burdens have risen to record highs. For every 100 renters with extremely low incomes, there are only 34 affordable rental homes available. This shortage is largely to blame for increased home prices and rents. We simply haven’t built enough housing—especially affordable housing—to keep up with the need. 

The federal government provides some direct funding to support the development of affordable housing through the HOME Investment Partnerships Program (HOME), the National Housing Trust Fund, and the Community Development Block Grant (CDBG) program. The US Treasury’s Low-Income Housing Tax Credit (LIHTC) program also provides incentives to the private sector to create approximately 100,000 units of affordable housing annually. But existing programs meet only a fraction of the need for new units among households with low and moderate incomes.

To address the mounting crisis, the Biden administration’s budget for fiscal year 2025 calls for $20 billion in competitive grant funding for states and localities to build and preserve affordable housing. The proposed Innovation Fund for Housing Expansion aims to provide incentives for localities to remove barriers to housing development and increase the supply of affordable housing based on local needs.

For federal policymakers looking to boost the supply of affordable housing, the 2021 American Rescue Plan Act’s (ARPA’s) State and Local Fiscal Recovery Funds (SLFRF) program offers lessons on how flexible federal grant programs can support housing development and preservation. Our research shows that although there's growing interest among localities in creating affordable housing, many localities struggle to navigate existing housing programs’ complex and inflexible rules. 

When given flexibility, local governments allocated federal funds to affordable housing

Through ARPA, Congress allocated $350 billion in flexible SLFRF dollars to state and local governments to support their response to and recovery from the COVID-19 public health emergency. Among many potential uses, localities are permitted to use SLFRF for housing-related needs, including housing development and preservation. The funds must be allocated by December 31, 2024, and spent by December 31, 2026.

Our initial research on the program suggested a strong interest on the part of local governments in using SLFRF to support the development of affordable housing. We found that as of September 2022, the largest local governments had budgeted more than $3 billion for housing-related uses, including $1.2 billion for affordable housing development and preservation. By September 30, 2023, these allocations increased to $4.1 billion for housing uses, with $1.9 billion budgeted for affordable housing. This suggests continued interest on the part of local governments in using flexible funds to support affordable housing production.


Three lessons from ARPA to help federal policymakers design flexible housing funds

To understand how localities directed SLFRF funding to affordable housing development, we interviewed city and county administrators from six localities across the country. Most localities we interviewed planned to use SLFRF to develop and subsidize housing for households with extremely low incomes (those with incomes up to 30 percent of the area median income)—housing units that for-profit developers would likely not otherwise produce.

Our findings offer three lessons that could inform the design of new funds to support affordable housing, including President Biden’s proposed Innovation Fund for Housing Expansion:

  1. Flexible funding allows local decisionmakers to address their community’s needs. The relatively unrestricted nature of SLFRF, compared with other federal housing programs, allowed local administrators to experiment more freely and develop creative solutions to meet local needs. It also allowed localities to work with local and often underrepresented developers who had less experience with typical federal government requirements. One city, for example, used SLFRF to create a revolving loan fund to support nonprofit affordable housing developers with acquisition and development costs.
  2. Localities need more funding sources for permanently affordable housing. The lack of permanently affordable housing compounds the current affordability crisis. Recognizing this, several localities planned to use SLFRF to create either permanently affordable housing or housing with extremely long-term affordability restrictions (50 years or more). Interest in permanently affordable housing is growing across the nation, with programs proposed in California, Hawaii, and Washington, DC. But permanently affordable housing is difficult to develop with existing federal funds, many of which require only 30-year affordability periods (or shorter) on subsidized units, after which previously affordable units become market-rate units and initial subsidies are lost.

    Although the administration’s proposal recognizes permanently affordable housing as one eligible use of the new funds, priority could be given to these programs, which can remove some portion of housing from the speculative market and maintain affordability in perpetuity.
  3. Federal funds must be easy to use. Administering affordable housing subsidy programs like LIHTC and HOME is complex and costly. The SLFRF program provides a helpful road map for how policymakers could craft new affordable housing funds, without putting too much administrative burden on localities. To do this, the federal government or other fund administrators should provide clear guidance on how the new funds might be combined with existing sources of federal funding and offer technical assistance to localities.

    In our research, we found many localities sought to combine SLFRF with other sources of federal funding (e.g., LIHTC, CDBG, and HOME funds) and state, local, and philanthropic funds because of the large capital investments required to build affordable housing at scale. Many interviewees expressed having difficulty understanding and complying with the varied regulations across different federal funding sources. Some resorted to hiring consultants and legal teams to understand how to use SLFRF with other federal funds. Such complexities tend to place lesser-resoured localities at a disadvantage and make it difficult for them to receive funding that could be used for housing.

Our research shows that additional, flexible funding to support affordable housing development and preservation would help improve the housing shortage, especially for households with low incomes. Such a fund could accelerate local, innovative solutions that could have replicability elsewhere. Given the level of need, annual federal funding is an important part of what will need to be a multifaceted approach to easing the affordable housing crisis.


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Research Areas Housing
Tags Federal housing programs and policies Federal budget and economy Housing affordability Rental housing Housing stability Housing markets Housing subsidies
Policy Centers Research to Action Lab
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