Local Innovations To Increase Affordable Housing

Local Innovations To Increase Affordable Housing

An acute and increasing need for affordable housing exists in many parts of the country. The Joint Center for Housing Studies of Harvard University recently released its "America's Rental Housing 2024" report, which finds that 22.4 million cost-burdened renter households, representing half of all renters, spend 30 percent or more of their income on housing and utilities. Of these, 12.1 million are severely cost burdened, spending 50 percent or more of their income on housing and utilities. In recent years, cost burdens have increased for households in all income bands, particularly middle-income renter households. This affordable housing crisis affects cities of all sizes as well as suburban and rural areas nationwide. In its 2023 report "Out of Reach: The High Cost of Housing," the National Low Income Housing Coalition states, "In no state, metropolitan area, or county in the U.S. can a worker earning the federal or prevailing state or local minimum wage afford a modest two-bedroom rental home at fair market rent by working a standard 40-hour work week. In only 7% of counties nationwide, not including Puerto Rico, can a full-time minimum-wage worker afford a one-bedroom rental home at fair market rent."

Federal investments are the largest funding source for addressing housing affordability challenges. The federal government supports affordable housing through various programs addressing both sides of the affordability gap, the largest of which are HUD's Housing Choice Voucher (HCV) program, which subsidizes rental payments for 2.3 million households, and the Low-Income Housing Tax Credit (LIHTC) program, which raises equity capital for the rehabilitation and construction of rental housing for low-income households. Federal investment in the HCV and LIHTC programs, public housing, project-based rental assistance, the HOME Investment Partnerships Program, the National Housing Trust Fund, and the Indian Housing Block Grant programs totaled approximately $69.8 billion enacted for fiscal year 2024. The widespread persistence of cost burdens among U.S. households, however, indicates that these programs alone are not sufficient to address the nation's housing affordability crisis. Indeed, only one in four eligible low-income renter households receives assistance from the federal rental voucher program.

Because of the pervasive need for more affordable housing and the limits of federal assistance to serve all who need it, state and local governments have found that they must be more creative both in how they use federal funds and how they supplement those funds with local policies to increase housing affordability. 

Notable Recent Innovations

Revolving Housing Production Loan Funds. One of the more promising innovations in affordable housing production is the revolving housing production loan fund, which policymakers have implemented in Montgomery County, Maryland, and Atlanta, Georgia. A state or local government can establish a capital fund administered by a state or local agency, such as a housing finance or public housing agency (PHA), to finance mixed-income multifamily housing with affordable units. Once the property is leased, the loan can be revolved out and replaced with a permanent funding source, replenishing the loan fund for financing additional development projects. The sponsoring government agency owns the development, and private entities construct it. Paul Williams, executive director at the Center for Public Enterprise, notes that in addition to an initial source of capital, a PHA needs to build capacity for underwriting and dealmaking; however, they can accomplish this with a relatively small staff. Unlike policies such as inclusionary zoning, which imposes a fixed requirement that may make a deal infeasible, revolving housing production loan funds can fund projects flexibly, achieving the optimal affordability conditions for each individual project. For federal programs, says Williams, Congress appropriates a specific funding amount that localities can spend. The revolving fund, however, incentivizes localities to be "deal hungry" and proactively seek more projects. Williams says the production fund can potentially scale up to become a market-shaping influence that broadly promotes affordability.

Leveraging Public Land. Local governments can make publicly owned land available at low or no cost for affordable housing development. Local governments, particularly those in markets with high land costs, may own vacant or underused land that can be offered first to nonprofit or other affordable housing developers, either at market rate or at reduced cost. Local jurisdictions may also collocate housing with a public facility such as a school or library. Municipalities can facilitate the reuse of vacant land by conducting inventories and maintaining a database of available properties and their attributes. Vacant land can arise from various former uses and public agencies, including schools and transit. Montgomery County, Maryland; King County, Washington; and Washington, D.C., all have legislation that encourages affordable housing development on surplus public land. In Montgomery County, public capital projects such as libraries, recreation centers, and transit stations require feasibility studies for the inclusion of affordable housing.

Innovative Use of Federal Funding Sources: HUD Section 108. HUD's Section 108 Loan Guarantee Program provides access to low-cost, long-term financing that helps communities leverage community development block grant funding and private capital for development projects. The city of Cincinnati, Ohio, is using a $34 million loan guarantee through Section 108 as starter capital for an affordable housing loan pool. The Cincinnati Development Fund, a nonprofit community development financial institution, will provide low-cost capital to leverage additional public and private investment to develop more affordable housing units in the city. Unlike the revolving housing production loan funds discussed above, Section 108 funds do not make the city an owner of the property, but like the revolving funds, Section 108 funding can help close financing gaps, making possible projects that would not be financially feasible without the public investment. The fund will mitigate the risk to developers taking on projects in underserved neighborhoods. The cities of Omaha, Nebraska, and Oakland, California, have set up similar loan pools in recent years.

Boulder, Colorado, has used Section 108 to expand the production of modular housing. The project finances the construction of a modular housing manufacturing center that is expected to build the capacity to construct 100 homes each year. Boulder Valley School District students will have the opportunity to train at the facility, further developing the area's housing construction workforce.

PRO Housing. Another federal resource that localities can deploy flexibly for planning and facilitating affordable housing production is Pathways to Removing Obstacles to Housing, or PRO Housing. This program issues grants for "activities that further develop, evaluate, and implement housing policy plans, improve housing strategies, and facilitate affordable housing production and preservation." More specifically, localities could create transit-oriented development zones, streamline permitting processes, reduce regulatory barriers, and build nonprofit capacity, among other activities. The city of Ketchum, Idaho, which faces an estimated shortage of 660 homes, will use its $2.5 million award to establish an Affordable Housing Gap Fund to help with affordable housing development costs such as acquisition and construction and to facilitate adaptive reuse projects and development on publicly owned land. The Metropolitan Government of Nashville and Davidson County in Tennessee is using its $5 million grant to establish an Affordable Housing Finance Program as well as a Housing Accelerator program, which will support emerging developers and give them access to lawyers, architects, and grant writers.

Office to Residential Conversions. Local governments facing both housing shortages and rising office vacancy rates are examining ways to facilitate and encourage office-to-residential conversions. One strategy is to eliminate regulatory barriers that otherwise would prohibit conversions or make them too costly. Another strategy is to offer tax abatements to incentivize conversions. Washington, D.C., has designated up to $41 million to fund a 20-year tax abatement for commercial-to-residential conversions to spur the transformation of empty office space into an estimated 8,400 housing units over the life of the investment. The program requires that developers of conversion projects offer at least 10 percent of the units at prices affordable to households earning 60 percent of median family income or 18 percent of the units at prices affordable to households earning 80 percent of the median family income. Other cities, such as Pittsburgh, are supporting conversion projects through loans. The Pittsburgh Downtown Conversion Program supports projects whose developers agree to reserve 20 percent of units at prices affordable to households earning no more than 80 percent of the area median income for a minimum of 40 years.

Innovation Is Hard and Necessary

The nation's affordability challenges are greater in scope and scale than the current level of federal investment can meet. Local governments must therefore creatively employ existing federal and local resources to leverage additional private investment. With urgent needs and limited resources, the pressure on governments to act quickly and "get it right" is high, making them reluctant to try unproven strategies that might not work. Although many state and local governments are innovating and replicating new strategies, equitable change consultant Maya Brennan says that they hold back from innovation for two reasons: first, they are "seeking, as they rightly should, evidence-based policies, but the evidence will be theoretical unless someone else has done it first," and second, "[T]he work, as it is, can be so hard that they do not necessarily have the staff power and capacity to go through that process." Brennan suggests that local governments can design a strategy based on theoretical evidence, test it, and either "fail fast" and move on or experience small successes and then scale up. This challenge underscores the value of learning from the successes and failures of peer agencies, which can involve peer-to-peer exchanges and technical assistance facilitated by nonprofit and academic institutions such as the Housing Solutions Lab or federal entities, including HUD. This article features a few of the innovative ways localities are leveraging limited resources to increase affordability. Continuing efforts to uncover new solutions and scale successful approaches will be necessary to meet the nation's affordable housing needs.