Accelerating Affordable Housing Through Market-Based Incentives
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.
Legislative Recommendations
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.
Executive Recommendations
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.
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.