Because affordable developers pay the same price for goods and services as market rate developers, the cost to build affordable housing continues to increase with market conditions, stunting projects and states’ attempt to meet their Regional Housing Needs Assessment goals. One way to address the cost of development is to incentivize manufacturers and consultants to reduce their upfront cost when working on, or supplying materials for, an affordable development. A supply-side tax credit (STC) could offer a tax incentive to material suppliers and professional service consultants that provide goods or services to affordable housing projects.
If consultants and manufacturers are willing to reduce their upfront cost in exchange for a dollar-for-dollar tax credit, the cost of developing affordable projects would significantly decrease. Since the amount of tax credits required for a project to be financially feasible is determined by the cost of construction, also referred to as eligible basis, the reduction in hard and soft costs realized through the STC would reduce the amount of low-income housing tax credits needed for each project. This would increase the number of projects that could receive a low-income housing tax credit allocation annually.
Allowing suppliers of affordable housing to claim a tax credit in their annual tax filings would reduce their corporate or individual tax liability, thereby immediately passing savings through to the affordable developer. The table applies a 30% Supply-Side Tax Credit to hard and soft costs of a recent project. In this scenario, the affordable developer will see $4.44 million in project savings.
When the affordable developer requests bids for services or construction of the project, notice will be provided in the Request for Proposals/Qualifications that if the manufacturer or consultant reduces their cost by 30%, they will receive a Supply Side Tax Credit Reservation when the project is awarded either 4% or 9% Low-Income Housing Tax Credits (LIHTC). The reservation of the LIHTC will simultaneously secure the manufacturer and consultant’s STC until the following tax period.
The STC differs from the LIHTC in that it is not an equity investment in the project but rather a tax incentive for suppliers of affordable housing. The STC also differs in that LIHTCs are earned over a 15-year period, and the STC is earned in the tax year the tax credit reservation is made. This timing allows suppliers to realize the tax benefits as soon as possible since a large portion of consultant costs are incurred well before a tax credit allocation. Because this is a new tax credit, it will be independent of the federal per capita-based LIHTC credit cap. The STC will also reduce the amount of LIHTC credits needed to make a project feasible through a reduction in overall costs. Therefore, implementation of STC would increase the number of projects LIHTC could fund. Administration of this tax credit would fall under the state agency that currently administers the LIHTC program.
Because the STC reduces corporate or individual tax liability, efficacy of the program may be reduced should the allocation of credits exceed a manufacturer’s or consultant’s tax liability. Therefore, the reduction in tax liability may be structured as a 30% reduction, rather than a dollar-for-dollar reduction in tax liability.
State-level support for a Supply-Side Tax Credit may be found in advocacy organizations in the affordable housing arena, like the Non-Profit Housing Association of Northern California, California Housing Partnership, East Bay Housing Associations, California Coalition for Rural Housing, and others. This proposal could be made to the California State Treasurer’s Office, which administers both the 4% and 9% tax credit programs.
Federal support may be found in federal advocacy organizations like the Grounded Solutions Network, the National Housing Conference, and the National Association of Housing and Redevelopment. Political support may be found in the Senate Finance Committee, which proposed the Workforce Housing Tax Credit Act, also known as the Middle-Income Housing Tax Credit, to both houses of Congress to build more middle-income housing.
With the assistance of Congress in drafting and proposing the Supply Side Tax Credit to the Senate Finance Committee and working with the California Tax Credit Allocation Committee and the California Debt Limit Allocation Committee to draft and issue program guidelines for the administration of the credit, we may get closer to solving this crisis. To draft the legislation itself could cost an estimated $150,000 in legal and financial advisor fees and $25,000 for lobbying and advertisement. This $175,000 cost can be raised through a capital campaign to organizations like Enterprise Community Partners that works with nonprofits to push policy change, along with support from the California Community Foundation that provides grants for long-term systematic solutions to the housing crisis in Los Angeles, as well as the grants from the San Francisco Foundation, and the Local Initiative Support Corporation. All of these organizations have the capacity to grant such an award and interest in making affordable housing less costly. This $175,000 cost would be reimbursed on the first deal that utilizes the STC. Additionally, money would naturally be saved long-term by reducing the upfront cost to build and by freeing up additional Low Income Housing Tax Credits due to the reduced cost and thus reduced tax credits needed on each Supply-Side Tax Credit deal.
The STC offers a new way to help control the rising cost of building the affordable housing this nation desperately needs.
This idea of merit originated from our Housing Ideas Challenge, in partnership with Learning Collider, National Zoning Atlas, and Cornell’s Legal Constructs Lab. Find additional ideas to address the housing shortage here.
Anyone who wants to understand housing production and its barriers faces crucial information gaps. Legislators, planners, housing developers, researchers, advocates, and citizens alike struggle to track proposed and actual housing production in a community or across communities, understand why proposed units go unconstructed, or determine affordability levels of proposed or approved units. Absent this information, the efficacy of interventions, including zoning reforms, is purely speculative, potentially resulting in inefficient, ineffective, or inequitable policies.
The Department of Housing and Urban Development (HUD), Department of Commerce, and Department of Transportation should jointly develop and manage a data resource—a Housing Production Dashboard—to track housing production within and across states and local jurisdictions to inform policy and research and to ensure that public investments in affordable housing production and preservation are made with maximum efficiency.
There is broad consensus that addressing chronic housing undersupply requires governments to ease constraints on housing production through zoning, finance, and other reforms. Our highly localized and decentralized land-use permitting system, the uniqueness of each local code and processes, and the idiosyncratic nature of local permitting administration obscures this information. Even as states and cities have adopted reforms such as allowing multiple units on single-family residential lots, there is little indication that single-family zoning caused unaffordable housing or that amending it will effectively address the problem.
No federal or state rule requires, and few agencies have developed, methods to track housing production despite this information’s relevance to fair and affordable housing, economic development, and transportation agencies. The few existing resources include the Federal Reserve Bank of Minneapolis’s Housing Indicators website and California’s Statewide Housing Plan Dashboard.
To make housing production data generally available to government agencies, policymakers, researchers, and citizens, we recommend the following:
- The Departments of Housing and Urban Development, Commerce, and Transportation should jointly create and manage an online Housing Production Dashboard with tabular and map displays.
- Data delivery should be a condition of each local government’s receipt of federal housing, economic development, or transportation grants.
- Annualized data submittals, made by local government staff through an online portal, should include the number of housing units proposed, approved, permitted, and completed in the locality, and for units in each category, the type(s) of housing (i.e., whether single-family, two-family, three-family, four-family, or multi-family), affordability levels, and time elapsed between initial application and approval, along with the reason(s) why proposed housing units were not ultimately permitted.
This data resource will facilitate affordable housing production by (1) enabling policymakers and researchers to compare jurisdictions’ regulations and processes, and the reasons housing units go unconstructed, to identify causes of underproduction; (2) substantiating fact-based development decisions by local and state policymakers and reducing the power of anti-development-motivated reasoning; (3) empowering advocates and citizens to apply political and legal pressure on officials that fail to address housing needs or concentrate affordable housing in low-opportunity areas; and (4) informing real estate industry and major employer investment and location decisions prioritizing the most advantageous communities in which to locate and build more housing.
The federal government has a precedent and expertise in providing this type of data through HUD’s CHAS and AFFH Data and Mapping tool, as well as numerous Census products. Federal agencies are best-positioned to incentivize data delivery for the Dashboard and ensure the provision of unbiased factual information. Academic institutions and advocacy nonprofits could partner in the product’s development through a federal request for proposals. In summary, the Dashboard presents an opportunity for more informed policymaking, better economic development, and a powerful public information resource, with particular benefit for small and budget-constrained localities, advocates, and builders without the resources to collect and analyze the data on their own.
This idea of merit originated from our Housing Ideas Challenge, in partnership with Learning Collider, National Zoning Atlas, and Cornell’s Legal Constructs Lab. Find additional ideas to address the housing shortage here.
Tax-exempt Private Activity Bonds (PABs) are one of the primary financial tools to build and preserve affordable housing as they generate as-of-right Low-Income Housing Tax Credits (LIHTC). However, the federal cap on those bonds creates a significant barrier to expanding overall affordable housing supply. By exempting affordable housing from the state volume cap, we can build more housing in states that are fully utilizing their volume cap.
The Housing Shortage Drives Up the Cost of Rental Housing
The United States faces a severe housing affordability crisis due to a shortage in housing supply that has been exacerbated by the pandemic. This shortage places pressure on households across the housing market but disproportionately impacts low-income households. The National Low
Income Housing Coalition found a shortage of over eight million homes affordable to very low-income households, those at or below 50% of the area median income (AMI). In New York State, this shortage is over 712,000 homes, contributing to soaring rents and a homelessness emergency. A renter in New York State needs to make over $40 per hour to afford a two-bedroom apartment at fair market rent as determined by the Department of Housing and Urban Development (HUD). In New York City and the surrounding suburbs, they would need to make over $47 per hour.
In a growing number of states, low-income renters are being priced out of the market with few housing options, forced to pay a large portion of their income towards housing costs and/or living in substandard housing. As renters compete for limited housing options, rent prices increase as a result of this demand.
Tax-Exempt Private Activity Bonds Fuel Affordable Housing Production and the Economy
LIHTC is the single largest and most significant tool to finance affordable housing and often works with tax-exempt PABs. Tax-exempt PABs are state and local bonds for certain “qualified private activities” that exempt the interest earned by holders from federal income taxes. When they are used to finance at least 50% of an affordable rental housing project – a requirement referred to as the “50% test” – they come with as-of-right LIHTC. This provides equity for the development and preservation of affordable housing for low-income households. These federal tax credits leverage additional project funding, including a commercial mortgage, and often other state or local subsidies. At marginal expense to the federal government, PABs boost our country’s housing stock while also creating thousands of jobs and generating new tax revenue and billions in economic spending – in the process shortening economic crises and reducing their severity.
LIHTC generated by PABs help finance most new low-income housing and are critical to meeting affordable housing supply needs. They produce affordable housing that serves incomes from 30 to 80% of AMI, with all LIHTC units in a development averaging at 60% AMI. Since its creation in 1986, the program overall has developed or preserved almost four million homes, generated $257 billion in tax revenue and over $716 billion in wages and business income.
Volume Cap Is a Financing Barrier to Expanding Affordable Housing Supply
Unfortunately, PABS are a finite resource, artificially limited by the federal “volume cap,” which limits the number of tax-exempt private activity bonds each state can issue. The volume cap was imposed as part of a larger effort to restrict the supply and demand for PABs through the Tax Reform Act of 1986. These restrictions were primarily intended to address concerns around cost and tax equity.
Every year, a new cap is allocated to each state based on population using a formula set by Congress. New volume cap that is not used by the end of the year may be carried forward for three years. New York already uses all its cap on affordable housing, financing the creation or preservation of about 10,000 units of affordable housing annually. Demand for additional volume cap is great, outstripping supply. As a result, some shovel-ready projects must wait three or more years before receiving financing, a significant delay that deters affordable housing development.
Volume cap allocation has not kept pace with the growing demand for affordable housing, increasing just 25% over the past decade, even as the nation produced 5.5 million fewer homes in the last 20 years than it did in the previous 20. Meanwhile, construction costs have skyrocketed. The cost of building materials increased over 20% in just one year in 2022, and developers have seen insurance rates double and triple over the past five years.
While PABs have several uses, most recent analysis shows 88% of issuances in 2020 went to multi- and single-family housing, continuing an upward trend of almost a decade, most of which is attributed to the increased demand for affordable rental housing. Nationally, the total amount of multifamily bonds issuances nearly doubled in only a few years from $7.2 billion in 2017 to over $13 billion in 2020. The number of apartments expected to be built from PABs increased by almost 20% from 2019 to 2020.
Further, as communities across the country face housing supply shortages, more states are reaching their maximum allowable PAB issuance. In 2019 and 2020, states like Maine, North Carolina, South Carolina, Utah, and Montana issued record levels of PABs for housing. One in three states have reached their volume cap in recent years, including California, Georgia, Kansas, Maryland, Massachusetts, Minnesota, Nebraska, New York, New Mexico, Nevada, North Dakota, Oregon, Rhode Island, Texas, Tennessee, Utah, Washington, and Washington DC. Further, the Infrastructure Investment and Jobs Act (IIJA) created two additional uses for PABs – broadband projects and carbon capture facilities – that could compete with housing for usage.
Volume Cap Exemptions Help Achieve the Public Good
There have been exceptions to state volume cap for 17 activities that contribute to the public good. These exceptions allow localities to build critical infrastructure without taking tax-exempt bonds away from other purposes. Congress has structured these exceptions in multiple ways. For example:
- Large public infrastructure such as airports, docks and wharves are exempt from volume cap.
- To address mounting capital needs for school construction and repair, Congress established a separate cap for financing some public educational facilities.
- The 2004 American Jobs Creation Act authorized $2 billion in tax-exempt bonds not subject to volume cap for qualified green building projects.
- Congress authorized $15 billion in tax-exempt bonds not subject to volume cap for highway and surface freight transfer facilities to address challenges in our transportation systems.
- For three uses, only 25% of bonds contribute to the cap. This includes high-speed intercity rail facilities, private projects to expand broadband access to underserved areas and facilities that capture carbon dioxide from the air.
Given the scale and urgency of the housing affordability crisis and the precedent for volume cap exemptions to address public priorities, we recommend that Congress enact legislation to exempt the development and preservation of multifamily rental housing affordable to low income-households from state volume cap.
There is political will to address the supply shortage. Recent increases in the HUD budget are helpful, but a significant HUD expansion to address our supply shortage will likely not gain congressional support in the immediate future, and the discretionary budget is constrained by the debt ceiling agreement.
We believe a tax-side solution is possible. LIHTC has enjoyed bipartisan support and legislation to meaningfully expand it, the Affordable Housing Credit Improvement Act (AHCIA), has bipartisan co-sponsors in both the House and Senate. There are several tax side proposals to allow more efficient uses of PABs that would produce meaningful increases in supply. The SAVE Act would create an exception to volume cap for the preservation, improvement, or replacement of federally assisted buildings to aid public and other HUD-assisted housing. The “50% test” unnecessarily limits volume cap as projects often have to allocate more bonds than are needed to finance the project to meet this requirement. The AHCIA would decrease the percentage of bond financing required to generate LIHTC from 50% to 25%, freeing up volume cap for states. However, exempting affordable housing from volume caps would address the underlying issue and have the greatest impact in this housing emergency.
There is also opportunity to provide volume cap relief through tax extenders or “must pass” bills that maintain government funding. Tax changes are often attached to broader bills. For example, we saw changes to LIHTC in the 2015 Protecting Americans from Tax Hikes Act, the 2018 omnibus spending bill, and the Consolidated Appropriations Act of 2021.
Even though LIHTC expansion has bipartisan support, the cost to the federal government from increased use of tax credits is a challenge. To limit or offset the costs of the tax credit (which is quantified by a reduction in future tax revenue, not direct federal spending), there are two options: (1) limit the exemption for a 10-year period, or (2) tie the exemption to revenue-generating reforms that are proven to add to the tax base, such as requiring state or local action on removing zoning barriers to access the state volume cap exemption for affordable housing. There has been no analysis on the cost of a complete exemption from volume cap, but AHCIA provisions to reduce the 50% test and expand LIHTC included in an early version of Build Back Better were estimated to cost about $12.7 billion in reduced revenue over 10 years. That investment, a small percentage of the $1.75 trillion proposal, could have housed 1.9 million low-income people while generating more than 1.2 million jobs, $137 billion in wages and business income, and more than $47 billion in tax revenue.
The housing shortage is an emergency affecting the lives of millions of Americans and the stability of our communities. Affordable housing is a public good, and the federal government has an obligation to respond to the needs of millions of low-income Americans. Adding affordable housing to the list of PAB uses exempt from volume cap would allow localities to build and preserve more desperately needed affordable housing.
This idea of merit originated from our Housing Ideas Challenge, in partnership with Learning Collider, National Zoning Atlas, and Cornell’s Legal Constructs Lab. Find additional ideas to address the housing shortage here.
The need for a national housing loss rate
Each year, an estimated 10 to 20 million Americans lose their homes through eviction and mortgage foreclosure, tax sales, eminent domain, post-disaster displacement, and other less-studied forms of housing loss. These destabilizing events lead to homelessness, job loss, adverse health impacts, and downward economic mobility. And yet, America neither tracks housing loss nor holds politicians and decision-makers accountable for keeping it low. There is no national database of evictions or foreclosures, and research from New America found that one in three U.S. counties have no available annual eviction figures. Without a clear picture of housing loss across the country, it is nearly impossible to pass data-driven policies that keep people housed.
If the United States wants to get serious about stemming housing loss, then it should establish a national housing loss rate to stand alongside the national unemployment rate as a key indicator of social and economic well-being. The creation of a housing loss rate—a metric of how many people lose their homes involuntarily over a given period of time, and why—would help drive accountability and action among policymakers and improve resource allocation, regulation, and housing supply interventions.
We envision working on two parallel, mutually reinforcing tracks to establish home loss as a regularly tracked indicator, akin to the unemployment rate. The first track would employ a survey-based approach to establish a national housing loss rate, while the second, longer-term effort would build local infrastructure to collect and analyze data on actual incidences of housing loss.
Congress should direct one of the lead federal housing agencies — most likely the Consumer Financial Protection Bureau (CFPB), the Federal Housing Finance Agency (FHFA), or the Department of Housing and Urban Development (HUD) — in consultation with the others to produce a feasibility study of developing and deploying a nationally representative survey to measure housing loss. The feasibility study should assess the most promising data collection strategies, the body responsible for implementing this effort (and whether this effort should be hosted inside or outside of government), and methodological questions such as the desired frequency, geographic coverage, and scope of the survey.
Concurrently, HUD, FHFA, the CFPB and the Census Bureau should use their existing authority to assess the feasibility of including housing loss questions or modules into surveys over which they have jurisdiction. Surveys identified by experts as possible entry points include the Census Pulse Survey, the American Community Survey, the American Survey of Mortgage Borrowers, and the American Housing Survey. Where the insertion of questions is feasible, HUD and Census should work with housing experts to develop and pilot proposed questions.
The Domestic Policy Council (DPC) should convene federal housing agencies to establish a comprehensive housing loss data collection, storage, and sharing strategy (including a plan for free, public access to the data in a way that also protects privacy) in consultation with housing advocates and academics. An interagency process to establish a national housing loss rate would be the strongest lever to achieve meaningful executive action.
Finally, the Office of Management and Budget (OMB) should incorporate housing loss into its Life Experiences projects. The Customer Experience Executive Order, enacted in 2021, requires OMB to work with the DPC and the National Economic Council to study salient “life experiences” during which Americans interact with government services, in an effort to improve government efficiency. OMB should explore whether better tracking of housing loss could be incorporated into one of the existing projects—it is most relevant to facing a financial shock and recovering from a disaster—or whether housing loss could be the subject of its own life experience project.
Developing a national housing loss rate will take time and resources, and most likely will require congressional action and funding. A survey effort would likely need a time horizon of at least five years, and collecting and understanding actual incidences of housing loss will take significantly more time. However, as with the U.S. unemployment rate, which took decades to establish, the necessity of such a metric justifies the effort. A housing loss metric, if rigorous, regularly collected, and available at the national, state, and local level, would have profound impacts on our understanding of the causes and consequences of home loss and improve our ability to develop policies and programs that keep people more securely housed.
The United States faces a shortage of 7.3 million rental homes affordable and available to extremely low income (ELI) renters—those making at or below 30% of area median income (AMI). The private market does not build and operate housing affordable to renters in this income bracket on its own. Subsidies are necessary for landlords to charge rents that these households can afford.
The National Housing Trust Fund (HTF) is targeted to increase the supply of ELI rental homes. Ninety percent of HTF dollars must be used for the production, preservation, rehabilitation, or operation of affordable rental housing, and at least 75% of these dollars must support housing that is affordable to ELI renters. By contrast, the nation’s largest housing production program—the Low Income Housing Tax Credit—primarily serves renters at 50-60% AMI.
The HTF is currently funded with a small annual fee (0.042%) on Freddie Mac and Fannie Mae activity. States received their first HTF allocations in 2016, and approximately $3 billion has been allocated to date. The Department of Housing and Urban Development (HUD) administers the HTF as a block grant to housing finance agencies in all 50 states and U.S. territories, which create state-level Allocation Plans to determine how HTF dollars are awarded. HUD’s formula for distributing HTF dollars is based on (1) the number of renters making at or below 50% of AMI who are severely cost-burdened, meaning that they pay more than half their income on housing costs, and (2) the shortage of rental homes affordable and available to households making at or below 50% of AMI, with extra weight given to ELI households.
To increase the supply of affordable homes, Congress should make greater investments in the HTF. Expanding the supply of homes affordable to ELI renters will also address the overall housing shortage. If millions of cost-burdened ELI renters could move into subsidized homes, more market-rate housing would become available to higher-income renters.
To avoid competition with other programs in HUD’s annual budget, the HTF is intended to be funded outside of the annual appropriations process. The Build Back Better package that passed the House of Representatives in 2021 included $15 billion for the HTF, but this provision was stripped out of the slimmed-down Inflation Reduction Act that Congress ultimately enacted.
As a new source of revenue, Congress should reform the mortgage interest deduction (MID) to make second homes ineligible and invest the equivalent savings in tax expenditures into the HTF. While Congress reformed the MID in the 2017 Tax Cuts and Jobs Act, this legislation ignored years of bipartisan tax reform proposals that proposed to eliminate the MID for second homes. The proposal would face pushback from second homeowners, but research shows that it is politically popular and bipartisan: a 2012 Quinnipiac poll found that 55% of Democrats, 55% of Republicans, and 58% of independents supported this reform. Elimination of the MID for second homes could win cross-cutting support from deficit hawks seeking to cut back federal spending and progressives who favor federal support for people with the greatest needs.
On its own, the savings from eliminating the MID for second homes will not enable the HTF to entirely close the gap between housing supply and housing needs of the lowest-income renters. However, a substantial boost in resources would enable the HTF to make a greater dent in the housing shortage.
More widespread impact would also make the HTF a more visible federal program, increase its constituency of supporters, and create the political will for even more dedicated funds in the future.
Lack of affordable mortgage programs for small businesses and developers contributes to the housing shortage in the United States. Primarily, commercial lenders guarantee and fund mortgages for small businesses and developers. These loans, known as investor and commercial mortgages, are very restrictive, resulting in only small pools of qualified applicants. Creating a federally guaranteed investor mortgage combined with an optional construction loan will assemble a larger base of qualified borrowers financially positioned to purchase and build more housing inventory.
Forming a federally backed investor mortgage and construction loan program does not require a large government expenditure initially. It only needs the full faith and promise of the United States government as a guarantee. Commercial banks could qualify the applicants and issue loans by utilizing existing systems servicing Fair Housing Authority (FHA) and Department of Veterans Affairs (VA) mortgage programs. The proposed program would be administered by the Department of Housing and Urban Development (HUD) and the VA, bypassing the need to create a new federal agency.
Creating such a program, however, would require legislative authorization from Congress as it would expand the federal government’s role from guaranteeing primary residential mortgages.
This proposed program would feature:
- No primary occupancy requirements
- 8% down payment
- 5% down payment for honorably discharged veterans
- Honorably discharged veterans allowed to withdraw earned government retirement funds tax free for downpayment
- 750+ credit scores of applicants
- Maximum loan limit of $1.5 million
- Interest rates lower than market available mortgages
- 30-year monthly amortization rates and payment terms
- Mortgage insurance requirements
- Optional construction loan for 80% of the appraised constructed or renovated value combined with the mortgage
- Full borrower recourse
- One loan at a time, previous loans must be paid
- Housing properties only
- Multiple parcels allowed
- Borrower required financial reserves
- No prepayment penalty
The program differs from the FHA 203k product by not requiring the borrower to occupy the property as their primary residence and by permitting both renovation and construction on land purchases.
A federally guaranteed investor mortgage program has many benefits. Having larger pools of qualified borrowers encourages the development of properties like duplexes, fourplexes, and other small apartment buildings in urban areas often overlooked by traditional developers. This not only promotes more infill development, it also addresses the important Missing Middle Housing concept by supplying more units at competitive rents for the middle-class workforce near their employment. Moreover, by using available local municipality initiatives, the owners could offer some or all their units at below market rents – potentially adding more affordable housing inventory as well. Finally, establishing larger pools of qualified borrowers provides developers of different races, genders, and ethnicities more opportunities to create generational wealth through a proven source: real estate.
The main argument against creating a federally guaranteed investor mortgage is the elevated risk of borrower default. While this concern is valid, there are several layers of protection built in to mitigate it. For example, the full recourse requirement ensures all borrowers’ assets are subject to government ownership to offset the default risk. Second, requiring a mortgage insurance fee along with the monthly mortgage payment for the loan term supplies additional funds to the federal government, reducing the risk. Limiting construction loans to 80% of the completed project’s appraised value provides a financial buffer. Last, in addition to meeting all the loan conditions, borrowers would be required to submit a detailed operational business plan for final approval.
While federally backed loan programs to purchase and build housing units already exist, they are designed primarily for larger projects. There are no federally guaranteed mortgage and construction programs designed for small businesses and developers doing small projects. Omitting this category threatens to restrict the potential development of housing inventory critically needed throughout the United States. To help boost the supply of housing, a federally guaranteed mortgage and construction program for small developers should be created.
The lack of affordable housing supply in high-opportunity metro regions impedes equitable economic growth. According to a study published in the American Economic Review, the misallocation of labor as a result of housing constraints has led to a 36% reduction in aggregate U.S. economic growth. Meanwhile, new market-rate construction often faces arduous permitting processes from local governments. This proposal would accelerate affordable development by granting permitting incentives to qualified projects, allocating rewards through a competitive bidding process favoring the most impactful proposals.
Under this system designed by the Department of Housing and Urban Development (HUD), developers would obtain credits to bid on packages of permitting privileges based on voluntarily incorporating enhanced affordability into their projects. Deeper affordability milestones would garner exponentially more credits to steer resources toward greatest needs. Additional credits would be awarded for proposals in regions facing urgent supply shortages. Developers could then leverage credits to bid on incentive packages in allocation auctions administered by HUD.
Incentives would include expedited reviews, waived fees, dedicated staff coordination, and density bonuses. While incentives are standardized federally, execution taps local jurisdiction staff funded by federal grants. HUD would disperse formula or competitive grants to municipal governments that elect to participate and hit prescribed targets. Codifying terms upfront attracts municipality buy-in and reduces the barrier of negotiating one-off municipality agreements. Instead localities can opt in to a pre-set federal program with funding levels and metrics already defined. By financing the supplemental staff capacity needed for faster reviews, this streamlined approach creates the right supporting conditions to accelerate affordable housing approvals.
To maximize the allocative efficiency of the program, robust targeting based on affordability and project urgency due to the disproportionate need for deeply affordable units in high demand metropolitan areas would be incorporated rather than a pure lottery. Some ways to achieve this:
- Award exponentially more tickets for projects reaching deeper affordability levels (e.g., 10x tickets for 30% Area Median Income (AMI) vs. 80% AMI).
- Give bonus tickets for proposals in high-demand, supply-constrained areas with the greatest affordability needs.
- Consider an auction system where developers bid credits for permitting privileges, with bidding eligibility and caps tied to affordability commitments.
This retains market incentives while steering resources toward most impactful projects.
An additional component would enable developers to trade their credits, optimizing incentive opportunities across regions when buying and selling credits. The tradeable tickets create a secondary market where developers can buy/sell eligibility to optimize incentive opportunities across regions based on their risk tolerance. For example, a large developer could acquire credits from several small projects to boost their chances of winning desirable incentives. Or developers could sell a portion of their credits to investors to finance projects while still participating in auctions. This flexibility and liquidity attracts broader private sector participation to expand affordable supply.
The full policy is novel, but elements like expedited permitting, fee waivers, and tax incentives have successfully boosted affordable housing in some states. For example, Massachusetts uses local option property tax exemptions. Combining tailored incentives with market mechanisms provides a new model.
Congress should pass legislation with bipartisan sponsorship authorizing HUD to:
- Design program architecture and allocation auction system.
- Disburse grants to local jurisdictions for incentive delivery.
HUD would administer the program design and auctions in phases:
- Phase 1: Design details through public commenting process
- Phase 2: Pilots in five regions
- Phase 3: Program expansion to additional 20 high-need regions
- Phase 4: National launch
HUD would compile and maintain a centralized database of zoning codes, public land holdings, and other housing development variables.
The White House Office of Management and Budget (OMB) would coordinate interagency efforts around alignment with the Department of Transportation, the Treasury Department, and other agency incentives like tax credits. Savings from streamlining bureaucracy and increased tax revenue as a result of improved economic growth could offset a substantial share of costs for the program. With strong bipartisan appeal, funds could be pulled from the Infrastructure Investment and Jobs Act (IIJA).
This proposal has the power to cultivate an ecosystem of incentives where developers compete to deliver public goods. Market dynamics drive outcomes, overcoming constraints on equitable growth while working through local partners. Using incentives over mandates minimizes political opposition as cities chip away at large affordable housing deficits to promote inclusive prosperity.
The Community Development Block Grant (CDBG) Program is one of the most flexible federal funding sources for communities to invest in housing. In the few instances where CDBG tools mention reconstruction, it is basically defined as demolishing and rebuilding one home where another one existed. The U.S. Department of Housing and Urban Development (HUD) prohibits adding dwelling units as part of the rebuild process. What if CDBG encouraged more than one home to be rebuilt?
The federal government should provide clear policies and programs to encourage reconstruction projects that add to the housing supply. Instead of limiting reconstruction projects to a one-for-one replacement, HUD should allow communities to rebuild homes to a number of units allowed by their locally adopted zoning and development codes.
Communities across the country are experiencing the triple whammy of aging people, aging homes, and aging infrastructure. This puts neighborhoods at risk for property vacancy and abandonment. Dilapidated homes become the target of public code enforcement and private speculators.
The potential for redevelopment attracts outside capital and contributes to neighborhood gentrification. CDBG dollars, often used to fund demolition, should not leave neighborhoods with empty lots. Instead, investments in reconstruction could preserve neighborhood affordability by funding well-designed homes with additional units.
While pushback against density continues, many communities have reformed zoning to allow for diverse housing types. Accessory dwelling units (ADU) are favored by seniors who want to age in place. Reconstruction policies and programs that allow for two to three units advance the Biden Administration’s Housing Supply Action Plan.
- Fund a reconstruction program aimed at preserving neighborhood affordability through the Community Development Block Grant.
- Direct HUD to publish clear regulations for a reconstruction program aimed at preserving neighborhood affordability.
- Publish clear regulations for a reconstruction program aimed at preserving neighborhood affordability.
- Lift the requirement that the number of housing units on the lot may not be increased as part of a reconstruction.
- Encourage communities to use CDBG funding for reconstruction in neighborhoods where local zoning and development codes allow for up to four replacement units.
Aging neighborhoods with decent-sized lots in communities with flexible development codes are good candidates for reconstruction. The federal government has an opportunity to supply a little more housing and keep neighborhoods affordable by investing in reconstruction.
Regulatory requirements for federally subsidized housing programs— such as the Low-Income Housing Tax Credit program (LIHTC) and Project-Based Section 8 Vouchers (PBV) — force households in crisis to wait months to be successfully approved for housing placements while affordable housing units sit vacant.
These policy proposals will simplify the affordable housing qualification process for all federal housing programs, primarily focusing on PBV and LIHTC, to move eligible households into vacant units more quickly. The current timeframe now is over a month, usually multiple months, to move a tenant into a unit. This should be shortened to a period of weeks, ideally days, for people in crisis. Shortening the approval process will mean more people housed for longer periods of time in housing that already exists.
Challenge and Opportunity
Income verifications are cumbersome, and most agencies require people to apply in person, often waiting for hours to be seen. Typically, applicants must return multiple times with additional required paperwork. The longer this takes, the more likely the original paperwork submitted will become stale, creating a vicious cycle of delay.
Eliminate mandatory in-person meetings: Agencies should be required to provide a phone-based mobile platform for applicants and allow digital submission of all documents. Pronto Housing, which has developed such an app, reports that when given the option 80% of housing applicants work on their applications between 7 pm and 1 am and on holidays and weekends. This will create fair access for people who work inflexible jobs that do not allow time off or prevent computer access.
Create “presumed-eligible” criteria: Households that are presumed eligible would have income qualification documentation waived at initial move-in. Possible criteria could include: recipients of other federal income-based programs such as Supplemental Nutritional Assistance Program (SNAP), Temporary Assistance for Need Families (TANF), Medicaid, or Low Income Home Energy Assistance Program (LIHEAP); severely disabled; chronically homeless; or seriously mentally ill. This should be achieved via executive processes within each agency. Los Angeles’s Community Development Block Grant (CDBG)-funded pilot program could be a model.
Allow access to HHS EIV: Allow all federal housing programs access to the Health and Human Services (HHS) Enterprise Income Verification (EIV) system. EIV, which the Department of Housing and Urban Development (HUD) currently uses but LIHTC and the Department of Agriculture (USDA) do not, provides information on employment status, unemployment, and Social Security benefits. Using this system across agencies would remove the need for applicants to submit redundant documents such as pay stubs and social security statements.
In-person inspections required for Section 8 vouchers (both project-based and tenant-based) are completed by short-staffed Public Housing Agencies (PHAs). These inspections, even if done promptly, can expire before a tenant becomes income-qualified, creating a second vicious cycle of delay.
Waive inspections for new construction: For new construction or rehabilitation, where units are already inspected by local building officials, licensed architects, and contractors, allow reliance on a Certificate of Occupancy or certificate from a licensed architect. Those documents should be good for 12 months.
Plan of Action
At least one important proposal (access to EIV), and possibly more, will require legislation. None of these proposals require new funding, although the mobile-based application system may require some technical assistance funding to PHAs, which could be implemented under HUD’s existing Technical Assistance grant program.
1. Eliminating in-person meetings: HUD can make an administrative change requiring PHAs to implement a mobile-based application system, and then help them implement the program through technical assistance grants. For LIHTC projects, implementation of a mobile system would require action by the Internal Revenue Service (IRS). The IRS should be able to encourage adoption for LIHTC projects and provide guidance through an executive process even if a mandate for mobile access would require legislation.
2. Presumed eligibility: Establish cross-agency criteria for presumed eligibility at different income levels. The Biden Administration should direct HUD to develop criteria for presumed eligibility for affordable housing, seeking input from the IRS and USDA.
3. Access to EIV system: New legislation would be required to allow the IRS and USDA to access the HHS EIV system. Despite this hurdle, it would ultimately save all agencies time and money to have a unified system of income verification. This has been a topic of discussion among federal employees at these agencies for over a decade, yet the legislative action required has been a barrier that needs to be tackled.
4. Waive inspections for new construction: For new construction or rehabilitation, HUD should be able to implement a waiver of the inspection requirement at minimum as an emergency measure for households in crisis via executive/administrative action.
Counterarguments to the above proposals might include (i) the difficulty in changing existing systems and processes, (ii) the possibility of accepting an over-income tenant and (iii) the possibility of moving a tenant into an unsafe unit. With regards to the possibility of accepting an over-income tenant, the income verification process has skewed too far to the extreme of counting every penny and worrying that someone who is low income one month could be wealthy the next month. The sad reality of economic mobility in this country is that people who are low income mostly stay in that position and the risk of moving in with someone who is over-income is very low. The risk of having an eligible person give up on the process because it is currently too difficult is much higher. With regards to an unsafe housing unit, this is a serious issue that should not be minimized. However, new construction or rehabilitation under local building official oversight runs almost no risk of being unsafe and the Covid-era measures HUD has used for inspections are now years into testing.
Given the extent of the housing crisis throughout the United States, it is a tragedy that affordable units sit vacant for months due to complex paperwork requirements. Directly addressing the realities of access for low-income persons and treating homelessness like a true crisis by prioritizing housing access over paperwork will increase occupancy throughout the country by moving households into vacant units faster.
Many recent regulatory reforms are intended to spur new housing development, but timely data on the location and quantity of new housing is limited. The most comprehensive data source on new development, the U.S. Census Bureau’s Building Permit Survey (BPS), relies on antiquated methods that can introduce a variety of errors and biases. Individual jurisdictions are asked to submit regular reports on the building permits they issue. In addition to the potential for human error, many jurisdictions are not asked to report on a monthly basis, and some that are asked to report on a monthly basis don’t do so. As a result, although the BPS is reasonably reliable at high levels of geographic aggregation (e.g., counties, states, metro areas), it is less reliable at the municipal level. Moreover, the BPS does not provide any information at lower levels of geography (such as the census tract or block group). This is a problem, because many recent land-use regulation reforms are intended to spur development in specific areas, such as transit-rich or high-resource locations. The lack of accurate, timely, geographically precise permit data makes it hard to assess whether these regulations are working.
The Census Bureau should work with information technology (IT) vendors, states, and local governments to facilitate the automation of local building permit reporting. All large jurisdictions (and many small jurisdictions) use some form of computerized tracking system for building permits. In some cases, the tracking system involves specialized software, typically developed by a private vendor. In other cases, it’s simply a spreadsheet. A uniform software tool for inputting building permit data would make the BPS more reliable, and it would also facilitate more fine-grained geographical analysis of new housing development. Data from the tool could be directly transmitted to the Census Bureau, reducing the potential for errors in local aggregation and tabulation of the data. More fine-grained geographic data would help the Department of Housing and Urban Development (HUD) to assess whether local efforts to affirmatively further fair housing are bearing fruit. It would also help states that have recently adopted regulatory reforms concerning fair housing and transit-oriented development to assess the impacts of those reforms. Moreover, automating the collection and transmission of data would reduce paperwork burdens for local governments.
The Census Bureau should first explore using the same appropriation source that is funding the Modernizing Construction Indicators (MCI) project. This funding may be sufficient to launch a pilot project that would convene a working group of local and state officials, software vendors, and researchers to identify the key attributes needed in this new reporting system. Whereas the MCI project is currently focused on improving the BPS by using data from vendors who collect building permit data from governments, the proposed project involves working with the vendors who provide information technology services to governments. Rather than relying on a patchwork of private vendors with different data standards and licensing rules who collect data from local governments and then repackage it, the Census Bureau and other agencies should contribute to the development of IT solutions that can be used by the vendors who provide service to local governments. These IT solutions can, in turn, feed into the Bureau’s own standardized data collection process.
The pilot program would involve creating and deploying software that would record the same permits currently covered by the form used for the BPS. The data collected should include the geographic coordinates for each newly permitted structure and the number of units included in each structure. Local jurisdictions that volunteer to participate would receive funding to implement the new system, either from the same appropriation source funding the MCI project or from a separate congressional appropriation. The Census Bureau would revise the system based on the pilot program for broader rollout, for which Congress would have to provide additional funding.
Federal agencies (e.g., HUD), state governments, and nongovernmental organizations could use the data to better assess the efficacy of land-use regulatory reforms. Both government entities and advocacy groups are largely flying blind with respect to their reform efforts, due to lack of data. In order to assess, for example, whether reforms targeted to transit-rich or high-resource locations are yielding development in those locations, advocates and policymakers need to know how much development is occurring in those locations.
In addition to yielding specific benefits for the evaluation of regulatory reforms, there are also broader social and economic benefits of timely, reliable, spatially precise data on new housing development. For example, such data facilitates the development of economic indicators by the Conference Board and Federal Reserve Board; helps financial institutions estimate mortgage demand; and contributes to various kinds of research by private businesses.
The coastal housing problem is highly salient in the housing discourse. However, more Americans live in rural areas than in all of California and New York combined. Even in metropolitan areas, most U.S. metros still have median home prices within 125% of construction costs — meaning that construction costs matter more than growth controls and land prices for home prices there.
Unfortunately, from 1987 to 2016, single-family residential construction productivity increased only 12%. Indeed homebuilding productivity has fared uniquely badly compared to the rest of the economy throughout the postwar era. Site-built construction overall, and single-family home construction in particular, remains resistant to productivity-boosting innovations.
Enter manufactured housing, the oft-maligned (or forgotten) housing type quietly providing 8.4 million affordable homes across the country. Modern manufactured homes have strict standards for structural integrity, material durability, and safety. In recent years, administrative changes to the Department of Housing and Urban Development (HUD) Code that governs manufactured home construction have allowed innovations like higher roof pitch and even limited multifamily designs to enter the market.
Like cars or airplanes, manufactured homes are factory-built on an assembly line inside a controlled environment. This allows greater efficiency compared to site-built homes, where workers need to perform their duties in all weather conditions and sometimes awkward positions. Because manufactured homes are built indoors, workers can operate more efficiently and safely. This efficiency has a significant cost advantage, according to the Joint Center for Housing Studies at Harvard University, up 25-65% less than equivalent site-built construction.
Despite their efficiency advantage, manufactured homes face discriminatory barriers to fair competition with site-built construction. Many state laws and local zoning codes restrict or exclude manufactured homes, often based on architectural features common only on manufactured homes, like the congressionally-mandated permanent chassis.
The permanent chassis under every manufactured home must be retained even after permanent installation onto the land. This requirement is meant to retain nominal interstate portability, even though manufactured homes are rarely moved after they are attached to the land. The permanent chassis limits architectural flexibility by requiring the home to be installed higher off the ground to account for the chassis’s vertical height, makes basements less practical, and effectively precludes using HUD Code construction for upper floors due to the weight and bulk of the chassis.
In the past, organizations like the National Association of Homebuilders opposed reforming the HUD Code chassis requirement in an effort to protect home builders from more efficient, factory-made competition. Today, with the construction sector at full employment, this motivation for opposition has subsided.
Congress alone can eliminate the permanent chassis requirement for manufactured homes because the requirement is part of the definition of a manufactured home established by Congress. To do this, Congress must amend the definition of a manufactured home to remove the phrase “on a permanent chassis.” By doing this, Congress can eliminate wasted construction materials, allow new multifamily design options under the HUD Code, and unleash competition from factory-built manufactured housing.
Plan of Action
Identify and engage key stakeholders
- Stakeholders include National Association of Home Builders, National Association of Realtors, Manufactured Housing Institute, and other relevant organizations in the manufactured housing policy space.
- Conduct outreach to stakeholder organizations to ensure positional alignment and efficient use of resources for legislator education.
Educate legislators on the basics of manufactured homes, their role in the housing market, and their inherent efficiencies.
- Member education will take the form of in-person and virtual meetings with member and committee offices in both chambers. Members on relevant committees and a geographically diverse slate of members who are active in housing policy will be prioritized.
- Legislator education will focus on removing a federal barrier to consumer choice and allowing fair competition between different construction methods. Additional talking points will include that the reform requires no appropriation and will improve access to modest and starter homes across the country.
The end goal is to incorporate revised manufactured home definition without permanent chassis requirement into must-pass legislation. An alternative is to pass it as standalone legislation.
Based on conversations with HUD staff, it is our understanding that once the permanent chassis requirement is lifted by Congress, HUD and the Manufactured Housing Consensus Committee will need to revise its existing administrative regulations to incorporate off-chassis construction into the existing HUD Code, or it could develop a parallel HUD Code for off-chassis construction.
After the HUD Code revisions are completed, homebuilders will have more design flexibility, and consumers will have more options beyond local site-built home builders for small and starter homes. Increased uptake for manufactured construction following this policy change will come from allowing HUD Code construction to compete more evenly against site-built construction.
Most Western states wisely require new housing developments to have an assured water supply, generally giving developers and communities three options to “create” new water for development: (1) build new storage and conveyance to capture unused water; (2) purchase and legally transfer water rights from an existing user; or (3) pursue “demand management” by lowering water use among existing users. Meanwhile, Section 40901 of the Infrastructure Investment and Jobs Act (IIJA) provides $8.3 billion over five years for the U.S. Bureau of Reclamation (USBR) to provide partial funding for projects involving water storage, water recycling and reuse, and water efficiency projects in Western states. The USBR should prioritize funding water projects for local governments that would expand the production of new housing in their service areas if given the water resources to do so.
Local governments in the West employ a variety of policies to ensure adequate water supply. In some places developers must pay water impact fees to connect to the public water system, while in others they must purchase and dedicate water rights to cities for approval of new housing. Alternatively, some places resort to building moratoriums to address insufficient water supplies. The cost of water for a new single-family home can exceed $60,000, a significant barrier to new construction in some places in the West.
- The Biden-Harris Administration should identify and work with USBR authorities who are interested in urban housing-water issues to build institutional support.
- Issue a directive similar to the directive aimed at the Department of Transportation to score grant proposals in part based on their ability to increase housing production in the applicant’s service area. Metrics that capture the ability to promote housing production might include:
- An objective measure of local water availability for an applicant, such as the 10-year average of water demand (the volume of treated and delivered water) and supply (average yield and a firm yield in their water portfolio).
- A subjective measure such as the estimated year in which projected water demand will exceed projected supply or a description of the local political concerns about growth and adequate water supply.
- Explicit information on how water savings will be used. For example, water savings could be stored in the local government’s “water bank” and given to affordable housing projects, or used to lower costs for private transit-oriented developments.
- Similar metrics as those in Department of Transportation applications, which include information on local policies to promote density.
- USBR should communicate goals and metrics to applicants, have applicants submit metrics as a part of grant applications, and favor grants using the metrics.
While there could be pushback from USBR authorities to using funding in pursuit of housing development, the IIJA statutory requirements (such as requiring that funding go to projects that increase water use efficiency or enhance water management) leave ample leeway for the Biden-Harris Administration to direct the USBR. Because demand management requires no legal change in water rights and limited investment in new infrastructure, targeting the USBR’s WaterSMART grants is likely the best place to start. Additionally, promoting demand management will likely have support from Western environmental groups with strong preferences against both building new infrastructure to divert water from rivers and “buy and dry,” where farmers fallow land and sell their water to cities.
Only $2.9 billion of the USBR funding in the IIJA has been allocated to date. Scoring grant proposals in part based on their ability to boost housing supply is a smart use of the remaining IIJA funds and future USBR funding.