Affordable Housing 101

How do we ensure that affordable housing stays affordable? How can my community fund its affordable housing efforts?

How do we ensure that affordable housing stays affordable?

The public invests considerable resources creating affordable rental and for- sale homes for working families. Because public resources are limited, communities have a vested interest in ensuring that these homes stay affordable over time. For rental developments, policies to maintain long- term affordability include covenants requiring that new affordable developments remain affordable in perpetuity (or as long as possible), along with realistic funding structures that make it possible for owners to make good on this promise. It is also important to put policies in place to preserve the affordability of existing affordable rental developments in danger of leaving the affordable inventory as a result of market pressures and expiring subsidies.

In regards to for-sale homes, communities can adopt shared equity homeownership policies, such as community land trusts or shared appreciation mortgages. Shared equity homeownership represents a unique approach to affordable homeownership. Under this approach, a state or local government provides funding to help a family purchase a home. In return for this investment, the government entity shares in the price appreciation of that home. The public’s share of the home’s appreciation may be used in two ways; it can either be returned to the government in the form of a cash payment that can be used to help another family, or it can stay with the home, reducing the cost of that home for the next family.

By sharing the gains in home price appreciation with the public investor, shared equity homeownership results in substantial benefits now and for years to come. Homebuyers benefit from a substantially lower home price and the opportunity for significant home equity gains. Local communities benefit by retaining vital workers who otherwise couldn’t afford to live in the communities they serve. And, by ensuring that the public’s investment keeps pace with the housing market, shared equity strategies allow governments to help generations of families achieve homeownership with a single initial investment.


How can my community fund its affordable housing efforts?

With reduced federal dollars available for housing and shortfalls in state and municipal budgets, most communities have to get creative. Many communities pull funding together from a variety of sources, finding private and non- profit partners to stretch the resources they have to make them go further.

The Consolidated Plan merges all the planning and application requirements of four HUD block grants that can be used for affordable housing: HOME, Community Development Block Grants (CDBG), Emergency Shelter Grants (ESG), and Housing Opportunities for People with AIDS (HOPWA) grants. These funds are provided directly by HUD to large cities and urban counties, as well as to states, who allocate these federal grant funds to jurisdictions that do not receive money directly. Communities must submit a Consolidated Plan to receive these funds. Other direct HUD funding for new affordable housing development is provided through the Section 202 Supportive Housing for the Elderly and Section 811 Supportive Housing for Persons with Disabilities programs.

The largest source of federal funding for new development of affordable homes is actually provided not by HUD but through the Low- Income Housing Tax Credit administered by the Internal Revenue Service as part of the tax code. There are two types of Low- Income Housing Tax Credits: 9 percent and 4 percent credits. In most states, competition for 9 percent credits is already fierce. However, more could be done to utilize 4 percent Low- Income Housing Tax Credits by linking local subsidies. Rural Development, an agency in the U.S. Department of Agriculture, operates a broad range of programs to support affordable housing and community development in rural areas. RD offers both direct loans and guarantees for mortgages extended by others. The agency also operates the Section 515 program, which provides low- cost mortgages for property owners to develop rental housing that is affordable to the lowest income rural residents.

Generate state or local funds.

In addition to federal funds, many states and localities fund housing and community development from local revenue sources such as property taxes or general city or state tax revenue—all of which have been affected by the economic downturn. Some communities earmark money from real estate transfer taxes, property taxes, or other sources to finance housing trust funds that, in turn, finance the construction or rehabilitation of homes. Some float general obligation bonds or use future tax revenues (tax- increment financing) to fund new housing efforts. Others levy impact fees on new development as a way of funding some of the required infrastructure for new developments, including linkage fees on new commercial development.

Mobilize non- traditional partners.

Faced with shrinking budgets, some communities are leveraging support for affordable homes in other ways. For example, when employment markets are strong and affordable housing is lacking, employers face the problem of attracting and retaining workers. During these times, communities can engage employers by helping them implement employee benefit programs that provide homeownership counseling and financial assistance for down payments or rent. Many communities work with foundations or other nonprofits able to commit resources for specific housing projects and programs in the community.

Use existing resources creatively.

Communities are finding ways to stretch the resources they have to go further. One strategy, implemented with great success in some jurisdictions, is recycling down payment assistance. Instead of cash grants to families, down payment assistance is structured as forgivable loans or as silent second mortgages that are repaid when the home is sold. To further preserve the buying power of public subsidies, in some places, communities receive a share of the price appreciation upon the sale of a home, in addition to their initial investment. All are ways to ensure limited grant money can reach more families.

Recognize it’s not all about money.

Not all housing initiatives require money. Communities can enact policies that provide incentives to the private market to create more housing. Donating public land or facilities for conversion to homes by private or nonprofit developers is one option. Making the permitting and approval process less time consuming can help builders and owners move forward with plans to build or rehabilitate homes. Affordable dwelling ordinances offer density bonuses in return for providing affordable homes. Rezoning parts of the jurisdiction for housing or implementing inclusionary zoning policies are other possibilities that do not require new dollars.