Homes of all types are currently unaffordable to many working people nationwide. In large part, this reality stems from simple supply and demand. Since the 2008 Great Recession, the country hasn’t built enough housing to keep up with population growth. Slow local approval processes, byzantine zoning laws, and, recently, high interest rates have all stymied new construction. The result: We need an estimated 3.9 million more housing units to meet existing demand.
Despite this need, the administration has signaled in its recent budget proposal to Congress that it would like to eliminate US Department of Housing and Urban Development (HUD) programs that subsidize developers, instead pushing these costs to state and local governments. However, doing so risks falling further behind on much-needed housing supply, as the national need is too large and state and local government budgets are too constrained to fill the gap. To solve housing affordability, all levels of government must be involved.
Subsidizing units for moderate-income households is essential
The current housing market is skewed toward producing high-priced housing. New development has become more expensive because of increases in labor costs, borrowing costs, and costs accrued by time to navigate local approvals. To make their investment pencil out, developers must charge high prices for the homes they build.
The result is a dearth of units affordable to middle- and lower-income households. Most housing units are priced for high-income earners, and the gap between the number of homes and households needing a home increases as price decreases. Nationally, only 35 affordable and available rental homes exist for every 100 renter households with extremely low incomes. Solving the housing supply challenge then requires encouraging developers to build new units affordable for moderate-income households.
Providing developers with a subsidy—paid for by federal, state, or local governments—allows them to charge a more modest price for the homes they produce.
Housing development subsidies are a small share of state and local budgets
In recent years, voters in states and localities across the country have approved large sums of money to subsidize housing development and ease housing affordability issues through housing trust funds, bond financing, and other vehicles for allocating subsidies to developers. In 2022, Colorado voters approved Proposition 123, which dedicates an estimated $300 million of income tax revenues to housing development.
Despite growing support, state and local governments still dedicate a very small share of their overall budgets to such subsidies. In 2022, the latest year that comprehensive local fiscal data are available, state and local governments allocated just 1.8 percent of their total spending to housing and community development.
Federal and local subsidies are needed to address housing shortages
Though states and localities recognize the need for housing development, much of the funding traditionally has come from the federal government through intergovernmental grants. In 2022, federal grants accounted for 28 percent of general state and local revenues on average, according US Census Bureau data. But state reliance on federal grants varies widely, with at least 30 percent of general state and local revenues coming from federal funds in 22 states.
Because states, unlike the federal government, must balance their budgets each year, major shifts in federal housing development funding would hinder states’ abilities to continue funding programs and projects, including efforts to increase affordable housing.
Additionally, many state and local governments have been using funds allocated through the 2021 American Rescue Plan Act (ARPA) for housing development. By 2024, state and local governments had allocated $7.5 billion toward development of 31,000 units of affordable housing (PDF). But ARPA funding will end by 2026, so states will be unable to continue supporting affordable housing development with this funding stream.
The administration’s proposed cuts would hinder new affordable housing development
In its recent budget proposal, the administration signaled that it would eliminate funding for HUD programs that support subsidies for developers, including the HOME grant program and Community Development Block Grant (CDBG) program. These programs have their limitations, but they are an essential subsidy source for housing development in most localities nationwide.
HOME funding often is used as gap financing for low-income housing tax credit (LIHTC) deals, which directs funding toward subsidies to close the affordable housing supply gap. Without HOME or an alternative, the math for many LIHTC deals wouldn’t work, leading to fewer affordable housing units built.
To address our housing shortfall and ensure home prices aren’t too high for most Americans, federal investments in housing development, in addition to state and local ones, are imperative, especially as the costs for construction labor and materials continue to rise.
The current vehicles for subsidizing housing development at the federal level—the LIHTC, HOME, the CDBG, and the Housing Trust Fund—have their flaws, but removing them entirely will not fix the housing shortage. Instead, federal policymakers can reimagine new, less onerous vehicles for ensuring homes remain affordable and accessible to all.
Proposed legislation, such as the Affordable Housing Credit Improvement Act and some proposals to modify the LIHTC (PDF) included in the recent House Committee on Ways and Means reconciliation bill, do just that. Rather than cutting HUD funds that support housing development, it makes sense to ease restrictions and red tape to make federal funding for housing development easier for states and localities to use.
Kathryn Reynolds and Gabriella Garriga
source: Urban Institute
