What Policymakers Need to Know About New and Evolving Publicly-Driven Housing Development Models in the U.S.

State and local governments are exploring ways to take a more direct role in financing, preserving, and developing housing to address the nation’s housing shortage with an array of public development models, according to a new policy brief by the NYU Furman Center and its Housing Solutions Lab.

Researchers examined nine cases spanning eight states – from Idaho and Illinois to Maryland and Massachusetts – to assess the variety of emerging government-led models where state or local governments act as developers, investors, or long-term owners to drive government-led housing development. In their analysis, they found that city and state agencies are leveraging a mix of federal, state, and local funding streams to take a more aggressive, and potentially riskier, position in affordable housing development than they do in today’s conventional models, aligning with their local markets while taking advantage of local expertise and resources.  

“We examine the potential benefits, risks, and challenges of these approaches, along with the cost considerations, and offer insights on how policymakers can expand public development to address housing shortages—especially for lower-income households—while ensuring responsible stewardship of public resources,” write the authors of the policy brief, “The Emerging Spectrum of Government-Led and Publicly-Owned Housing Development Models.”

U.S. Locations of Publicly-Driven Housing Development 

Interest in government entities taking a more active role in stimulating housing development, including taking an ownership stake, is growing. The range of proposals and models varies widely. In some cases, state and local authorities hire general contractors to directly build housing, while in others, they offer a combination of low-cost loans, publicly-funded equity investments, and property tax exemptions to build mixed-income housing developments that are ultimately owned and/or managed, in some form, by a government entity.

The recent shift by state and local governments in revisiting public development is occurring for a diverse set of reasons, according to researchers. In some regions, limited capacity among private affordable housing developers has necessitated government action. Other jurisdictions face federal funding constraints and are turning to local resources to fill funding gaps. In addition, among some policymakers there is an increasing interest in creating “decommodified” or “social” housing, consisting of affordable, mixed-income communities in which private entities are not able to capitalize on rising land values over time.

A Decline In U.S. Public Housing’s Scale 

Public development and ownership of housing are longstanding concepts in the U.S., particularly in the form of public housing authorities created under Section 9 of the United States Housing Act of 1937. The last few decades, however, have seen a steady decline in the scale of and support for the nation’s public housing stock. 

While a notable portion of the nation’s public housing stock still operates under traditional public housing rules, particularly in New York City, the government’s role in new affordable housing development has changed. Today, instead of direct ownership, public entities primarily focus on financing, regulating, and incentivizing private developers, both non- and for-profit, to create and manage affordable housing. As the authors note in the brief, “Traditional public housing authorities (PHAs) have faced chronic underfunding and operational challenges, leading to a shift toward this model.”

A Variety Of Government-Led Development Models Are Emerging

The NYU Furman Center and Housing Solutions Lab examined types of publicly-driven housing development currently in use or recently approved across the U.S. as part of a recent report for RIHousing and the Rhode Island Department of Housing. 

Researchers broadly categorized the models of publicly-led development as follows. For each model, they outlined considerations policymakers would need to have in mind when shaping such programs, and provided simplified financial analysis highlighting the construction and operating cost considerations inherent in all these models.

Group A: Mixed-Income Development with Public Equity Investment 

Models like those in Montgomery County, MD; Atlanta, GA; and Chicago, IL use revolving loan funds to finance a portion of the construction of mixed-income housing developments, where both market-rate and affordable units are built together. These government-backed funds offer financing that is lower cost than what private lenders would provide given the risks involved. In return, the government often secures an ownership stake. Unlike traditional affordable housing that is often 100 percent income-restricted to low-income households, these developments rely on market-rate units to help subsidize the affordable ones, which usually serve households earning 50-80 percent of the area’s median income (AMI). While these funds are designed to be self-sustaining, the below-market interest rates they offer (relative to what private investors would expect) may require ongoing subsidies or support to maintain financial viability over time.

Researchers found that these models require a number of conditions. First, they are unlikely to work in all kinds of markets. They are designed to produce a large number of units, and work best in higher cost neighborhoods, where market rents are sufficiently high to cross-subsidize the affordable units. Second, to be realized, they still require significant additional public investment and a number of financing tools beyond a revolving loan fund.

Group B: Public Housing Conversions 

Public housing authorities like those in Boston, MA; Cambridge, MA; and Hawaii are leveraging relatively new HUD programs, such as Faircloth-to-RAD, to expand their portfolios by redeveloping existing public housing units and adding new ones while retaining their public ownership stake. Often overlooked in debates about publicly-led housing development, these models highlight the importance of preserving affordability while improving conditions in some of the most affordable housing in the nation. These models use federal and local subsidies to renovate or rebuild housing, often adding deeply affordable units and, in some cases, market-rate units to cross-subsidize rent-restricted units. 

However, such models are most feasible in communities with capacity available under their congressionally defined Faircloth Amendment limit, which is based on the number of public housing units they operated in 1999, and often need additional forms of subsidy (Low Income Housing Tax Credits, Moving To Work funds, etc.) to make the development work. 

Group C: Fully Affordable Housing Models 

Long-standing models like those in Dakota County, Minnesota, and Idaho’s The Housing Company showcase how publicly-driven development can sustain long-term affordability with and without relying on the Low-Income Housing Tax Credit (LIHTC). These models use dedicated funding streams and portfolios of smaller properties to cross-subsidize costs, highlighting how specialized entities can focus on affordable housing needs effectively.

Two key characteristics bolster the success and sustainability of these models. First, they rely on large portfolios of units, developed over decades, to spread out the costs of financing, management, and repairs. Second, they have found ways to avoid or manage competition with for- and non-profit developers and now enjoy broad-based support.

Seven Questions Policymakers and Stakeholders Should Consider

There are seven key questions policymakers and stakeholders should ask to assess the potential role public development and ownership could play in an overall affordable housing strategy:

• What are the risks, returns, and opportunity costs of public funds?
• How can we maximize and streamline existing funding programs?
• What are the needs that only a public developer can fill?
• What local contexts can spur or hinder development?
• How can we identify a dedicated funding stream?
• Do we have the legal authority, capacity, expertise, and sustainable operating funding to operate as a public developer?
• How can we ensure that publicly-developed housing is sustainable over the long term?

While the emerging models explored vary in terms of structure, volume, and level of affordability, they all offer modern versions of publicly-led development, often without relying on LIHTC funding. Many, but not all, of the approaches are relatively new and have not yet weathered multiple economic cycles or broadened beyond their initial geographies, so there are still unanswered questions about their transferability and scalability. 

As the brief discusses, there are many considerations for policymakers considering pursuing such a strategy. A critical consideration is whether there is a distinct, unmet need that a public development entity could address more effectively and efficiently than the current landscape of for- and nonprofit developers. 

Regardless of whether other policymakers pursue public development, this study elevates ways to increase the impact of existing resources. By establishing dedicated funding streams, exploring reforms in tax policy and land use regulation, and maximizing their use of federal housing programs, policymakers can meaningfully expand the supply of affordable housing.