It’s no secret that the country is in the throes of a housing crisis. However, in the desperation to fix it, factions have gotten borderline religious about single, silver-bullet solutions. In reality, the housing crisis is more systemic and complex than ever before. Thus, moving forward will require a myriad of innovative, scalable solutions, elements of which are already being tried and tested at the state and local levels.
This housing crisis is unique; it is affecting homeowners and renters of all incomes, in all geographies. Freddie Mac estimates the U.S. is short a supply of 4 million housing units. The ratio of median home price to median income has surged for homeowners.
A staggering 45 percent of renters spend more than 30 percent of their income on rent, the threshold traditionally accepted as an appropriate rent burden. There is a severe lack of affordable housing supply, and homelessness hit a point-in-time record level in 2023. These problems come with a vast array of connected inputs and outputs.
The loudest voices advocating for increased housing supply have zeroed-in on restrictive land use policies as the primary culprit for our housing crisis. While land use restrictions are a key problem and reforming them is a potential solution, the crisis is rooted in broader systems failure. In short, the housing ecosystem has become overly federated, financialized, and fossilized.
Everyone in charge means no one in charge
Housing has become confusingly federated — everyone is in charge, so no one is in charge. The federal government has built an intricate set of primary and secondary market entities (e.g., FHA, Fannie Mae, Freddie Mac), a powerful set of homeownership tax incentives (e.g., the mortgage interest deduction) and a litany of affordable housing programs including the Treasury’s Low Income Housing Tax Credit (“LIHTC”) program and Community Development Finance Institutions and HUD’s HOME Investments Partnership Program, vouchers, and public housing. The Departments of Transportation and Energy have also recently gotten into the act with innovative loan and grant programs around energy efficient housing and transit-oriented development.
Reducing zoning hurdles and upzoning is undeniably an important intervention in our toolkit to combat the housing crisis, and one we support. However, it is unclear that zoning alone can dig us out of the affordable housing hole.
Meanwhile, states and localities provide both financial incentives to build more housing and implement restrictions that make housing costlier and more difficult to build. States are responsible for certain land use regulations, building code regulations, state Housing Finance Agencies, and certain tax incentives. Local municipalities also provide financial incentives through trust funds, tax abatements, and public asset disposition, but limit housing growth through some land use regulations, design and development restrictions, and rental regulations. The result is a maze of interrelated and conflicting programs and an unclear central nucleus for housing leadership.
More lucrative to buy than build
Housing has become intensely financialized. A confluence of factors coming out of the Global Financial Crisis made it more lucrative to buy than to build housing over the course of recovery and subsequent economic cycle, as we wrote in 2022. An overreaction to the subprime mortgage crisis and evolving land use issues froze new housing supply, and household formation grew and drove demand.
This was true even prior to the post-Covid demand boom. Housing markets saw so much rent growth that institutional investors could drive relatively low-risk investment returns by buying assets and increasing rents, rather than doing the hard work of developing new units to achieve those returns. These dynamics led to the institutionalization of the single-family rental sector and the rise of mega investors.
Meanwhile, at the truly affordable end of the spectrum, the cost of production of affordable units has become so high as to make many projects unfeasible. The system is now bloated with programs, rules and regulations, and the intermediaries needed to navigate them. In many cases, programs like LIHTC are wholly insufficient to make development math work, even when paired with additional density and the overall rise in Area Median Incomes.
Housing innovation stalled
Finally, previous housing innovations have become fossilized over time. The federal government oversaw a burst of proactive, structural interventions in the 1980s and 1990s, most notably the establishment of LIHTC in 1986, HOME in 1990 and HOPE VI in 1992. Since then, legislative interventions have been relatively reactive and limited.
The Neighborhood Stabilization Program in the wake of the Global Financial Crisis and the eviction moratorium in the wake of Covid were band-aid responses, rather than forward-thinking, systemic innovations, leaving the Rental Assistance Demonstration Program as arguably the only transformative program from HUD in the 21st century.
In the meantime, since 1990, the US population has grown by 80 million and an accretion of burdensome rules have made the deployment of federal funds alarmingly expensive and inefficient. Understandably, LIHTC, for all its impactful work, is inadequate to take on all the problems of today. And the stigma that lingers over public housing means that successful interventions routinely applied in Europe are largely off the American table. The resulting underproduction of affordable housing units is a feature rather than a bug of our system.
Facing an undeniable crisis and in the absence of meaningful federal leadership, states and localities have begun acting aggressively on housing. Because of the federated, financialized, and fossilized nature of housing policy, a wide array of states, localities, public authorities, private firms, philanthropies and others have all begun to experiment with solutions to the housing crisis that work in their own geography.
Yet housing is not just one thing: on the one hand, housing innovations can span new supply, existing preservation, or demand-side support. Housing innovation can also span the different components of preservation and development. The innovations we are most excited about are those that overcome the challenges in the current state while also delivering change across the range of the housing pipeline.
We strongly believe that a holistic approach to solving the housing crisis requires comprehensively identifying local innovations across multiple dimensions and sorting out how to scale the best of them while also adapting them to local contexts.
Zoning reform is only part of the answer
The most visible and common action has been zoning reform, at both the state and municipal level. Reducing zoning hurdles and upzoning is undeniably an important intervention in our toolkit to combat the housing crisis, and one we support.
However, it is unclear that zoning alone can dig us out of the affordable housing hole. A recent study by the Urban Institute astutely demonstrated a comparison between Houston and Boston. Houston is one of the most affordable cities in the country at the median due to its loose zoning restrictions. However, at extremely low incomes, Houston is more inaccessible than Boston, because Boston is more intentional with subsidizing affordable housing. Thus, to attack a housing crisis that uniquely affects all incomes, from coast to coast, zoning is but one tool in the toolbox.
State and local innovations to watch
While the focus has been on upzoning, state and local innovations have been much broader. We bucket these innovations into five categories: Land, Construction, Capital, Regulation, and Delivery.
Land interventions seek to enable housing production to happen faster and more broadly. Actions like land use reform and public asset disposition have been demonstrated in Atlanta and Massachusetts. Massachusetts has required communities with access to MBTA transit to adopt local zoning changes to allow for greater density. Atlanta recently stood up the Atlanta Urban Development Corporation, a specialized non-profit formed by the City and the Atlanta Housing Authority with the goal of redeveloping public land into mixed-income housing.
Construction interventions seek to reduce the cost to build housing and to decarbonize the housing stock. As the housing crisis has worsened, the housing sector is (finally) being disrupted by technological innovations and advances in building techniques and modular construction. Environmental and financial costs to build, in addition to workforce shortages, mean there are many facets of efficient building that states and localities are beginning to address.
Montana has recruited a 360,000 square ft modular home manufacturing plant aimed at more quickly increasing supply, while a developer in Kansas City has built the largest passive housing building in the world, Second + Delaware. The Building Energy Exchange initiative now operates in multiple cities, providing support to transform existing buildings to be high-performing, low-carbon, and energy efficient. All these examples deserve deeper examination so that they can be replicated and scaled.
Capital interventions seek to innovate on capital stacks that enable more and more affordable housing. Examples include the growth of housing trust funds, local tax abatements and financing and special purpose credit programs. The Montgomery County Housing Production Fund stands out as a unique publicly driven vehicle creating meaningful amounts of mixed-income housing. The Utah First Homes starter home program demonstrates interventions on the demand side with homebuyer assistance and on the supply side with an infrastructure bank and funding for construction.
Regulation interventions seek to protect renters through practices like rental registries and reduce obstacles in the way of housing production through efforts such as building code reform. California, a leader in state policy reform, is researching how restrictions on single-stair construction blocks production of smaller multifamily housing buildings. Cities across the US, from Washington, DC to Scranton, PA have implemented rental registries to better identify the location of rental units and provide support to landlords and renters alike in times of crisis.
Delivery interventions seek to build capacity for affordable housing at scale, recognizing the shortcomings of our existing ecosystem. Innovation will include new intermediaries and new functions for old intermediaries. The Tulsa Housing Strategy brought together developers, philanthropists, stakeholders, and social service providers to model public-private partnerships in furtherance of the City’s housing goals. San Francisco’s Housing Accelerator Fund has developed a set of tools and practices allowing them to deliver affordable units without up-front public subsidy; the public sector engages by pledging future operating support through vouchers. This effectively turns real estate risk into public finance risk and regularizes the process of designing and building affordable housing.
This landscape shows the promise of local and state innovations. But those innovations remain uneven and unorganized. Different geographies experience and focus on different components of the problem and remain constrained by capacity and lack of federal support. The bubbling of this innovative local energy needs to be corralled and amplified; some centrality and interaction between these ideas will serve to create a flywheel of housing solutions.
The Nowak Metro Finance Lab at Drexel University and Accelerator for America are in the process of standing up a National Housing Crisis Task Force to do just that. Led by a bipartisan group of co-chairs and backed by public and private sector Task Force members at the vanguard of housing innovation, it will bring the cross-geography, cross-income approach that has been missing in our housing dialogue.
We strongly believe that a holistic approach to solving the housing crisis requires comprehensively identifying local innovations across multiple dimensions and sorting out how to scale the best of them while also adapting them to local contexts. It requires thoughtfulness about precedents set outside of the U.S. and their applicability here. It requires translating hyper-specific interventions into policy change at the local, state, and federal level.
And it requires being open to transformative moves, which might include new financial and building innovations, new housing functions (e.g., Ben McAdams’ call for municipal property advisors) and even new national intermediaries that can help marry and leverage federal capital, state and local resources, bank debt, private investment and philanthropic largesse.
Stay tuned for more…
Bruce Katz is the Founding Director of the Nowak Metro Finance Lab at Drexel University. Michael Saadine is Managing Partner at Invisible Group, an interdisciplinary real estate investment platform. Ben Preis is a Research Fellow with the Nowak Lab, where Emily Desmond is the Special Projects Manager.
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