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The barriers to creating sufficient affordable housing across the country are diverse—from architecture and construction to zoning and permits to financing and investment.
This article is part of a Prospect symposium on tackling the housing crisis in America.
I grew up on a tree-lined street in Columbus, Ohio, a mile or two from the Ohio State University campus. It was populated mostly by single-family homes with nice-sized yards and driveways, and dotted with duplexes every few lots or so. At one corner, there were two small apartment buildings with six or eight homes each, and at the other, an elementary school. This always felt prototypically American to me—as anyone’s childhood neighborhood presumably feels. Color me surprised when I grew up and learned that such a street would be illegal to build in most cities in the country today.
Rewriting zoning laws to legalize such normal-seeming neighborhoods is core to any housing agenda. But even when it is legal to build, there are still hurdles—and beyond those, solutions. Right now in Massachusetts, there are 40,000 apartments ready to be built that haven’t yet put shovels in the ground. The tools are there, as are the permits, the workers, and tenants ready to move in. What’s missing is capital investment.
Local governments can meet this urgent challenge. But before we get there, let’s start with a sketch of the past 20 years of the housing sector.
The Cliff and the Crater
In 2006, after the collapse of the housing bubble that resulted in the Great Recession, homebuilding in America fell off a cliff. It had fallen off cliffs before, but never like this: Over the course of a few years, America went from building over two million homes per year to building half a million. The results were devastating for American workers and families: 500,000 people lost their jobs in the residential construction industry’s undoing.
The labor market eventually began to recover, as did household formation, particularly from young people in core urban areas. The share of homes available for rent gradually plummeted—falling from 7.6 percent to 3.6 percent over a few years in California.
This increase in housing demand without a concurrent increase in the supply of homes generated a slow-moving train wreck of rising costs. Prices across the country—of both homes for sale and homes for rent—skyrocketed. It was all very predictable and happening right before our eyes. The places where the shortage was worst, like California, saw similarly predictable explosions in homelessness.
In the mid 2010s, some San Franciscans noticed the trend and formed a group called the Bay Area Renters’ Federation, organizing to demand the city change its laws governing which type, and how much, housing can be built. This group helped to spark the Yes In My Backyard (YIMBY) movement that now, ten years later, is having a national political moment.
While those restrictions were being loosened, a semblance of a recovery in the housing industry took a decade to materialize. It wasn’t until 2020 that America got back up even to mid-’90s levels of housing production. All that lost time of low building left us with a huge hole to fill. Most estimates peg us at somewhere between 1.5 million and 5.5 million below trend, meaning that we need to overshoot significantly to get out of this mess.
Luckily for us, the past four years in federal policymaking have been all about industrial strategy: driving investment toward sectors that are key to social and political goals. For example, we are currently in the midst of switching our collective 4,000 terawatt-hours of electricity to clean sources. We are also driving a major onshoring of advanced manufacturing in the semiconductor industry.
Building enough units to house Americans has at least the same level of social and political importance as the energy transition and onshoring industrial manufacturing, if not much more so. An industrial strategy for housing, then, makes perfect sense.
The barriers to creating sufficient affordable housing across the country are diverse—from architecture and construction to zoning and permits to financing and investment. While hundreds of thousands—perhaps millions—of would-be homes across the country will, in fact, not be built due to exclusionary zoning policies that block certain types of building, we have another problem: housing that’s shovel-ready, but lacking investment.
This measure, authorized but not-yet-started homes, is tracked by the same census survey that tracks completed housing units. Since the government began tracking it in the late 1990s, there have been around 50,000 homes per year in would-be apartment buildings that fall to this fate. Over the past couple of years, that figure has more than tripled, spiking to over 165,000, and now settling to 140,000.
There are a few reasons for this: Interest rate volatility, which we’ve seen with the Federal Reserve’s attempts to fight inflation, is bad for predictability. As rates began to rise, many projects fell into limbo. Supply chain challenges, which at the time included materials like lumber and steel, also had an impact.
So to recap, we’re a few million homes short, and we’re issuing permits for hundreds of thousands of apartments every year that are shovel-ready, but not getting built. Well, most of them aren’t, anyway.
Enter the Construction Fund School of Thought
In early 2021, Montgomery County, Maryland, gave their housing agency, which is called the Housing Opportunities Commission, a new tool to help build those shovel-ready projects. Armed with a modest new $100 million investment fund, they went out and found a stalled project that had been proposed by a major East Coast developer, Bozzuto. This developer was ready to build, but was having trouble finding financing partners for the project, despite the fact that rates were at that point low, and local housing demand was through the roof.
The Housing Opportunities Commission effectively hired Bozzuto to build the apartments, while putting forward a short-term loan from its fund to help cover construction costs.
The project was a grand slam. The Laureate, which is now built, leased its 268 units to full capacity within months of opening. And with the Housing Opportunities Commission as the permanent majority owner, about one-third of the apartments are set aside for low-income tenants—all without using a dollar of federal housing subsidies, just a loan that has been paid back. The regional housing industry took notice: Now, Montgomery County has a pipeline of around 3,000 homes in the planning stages over the next several years, all using the new revolving loan fund.
Not long after construction finished on The Laureate, Atlanta took a stab at copying the approach, creating a nonprofit subsidiary of the city’s public-housing authority to manage the developments. And then Chattanooga did the same. Today, dozens of jurisdictions, including state governments themselves, are contemplating the programs.
In fact, this summer Massachusetts created a similar revolving loan fund for its state housing finance agency, which is the state agency that provides mortgages for federally supported affordable housing. MassHousing’s new program, the Momentum Fund, serves a similar purpose: providing short-term construction investment to shovel-ready projects across the state. In the coming months, the Momentum Fund hopes to start making a dent in those 40,000 stalled projects.
Local? Check. State? Check. Federal …?
These promising programs are netting thousands of mixed-income housing units across the country in a short time, and perhaps more significantly, in a particularly difficult economic environment. But state and local governments are limited by the capital at their disposal. To get construction financing programs in the hands of every jurisdiction with shovel-ready projects and really jump-start housing production, it will have to be adopted at the federal level.
Providing support to states that want to establish their own funds is one approach, though it would require an act of Congress. Giving our government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, the authority to participate in construction lending is another—and helpfully, that could be done with the stroke of a pen.
Fannie and Freddie are mainstays of the secondary market for housing; they buy loans and package them into securities to produce more capital for mortgage lending. They already purchase multifamily mortgages to assist apartment development, but they do not support construction loans to get projects built. (Freddie Mac is limited by its charter on construction loans, but Fannie Mae is not.) If they did, that would bring potentially trillions of dollars to the table to support shovel-ready projects.
We’re issuing permits for hundreds of thousands of apartments every year that are shovel-ready, but not getting built.
This summer, my organization released a report on this topic, sketching out what a national construction fund program housed within the GSEs would look like and how it would work to hack away at the backlog of housing needed across the country.
Providing support to state and local agencies like Montgomery County already has some purchase. In his 2025 budget proposal, President Biden put forward an idea for a Department of Housing and Urban Development (HUD) Innovation Fund for Housing Expansion, sized at $20 billion for one-time investment. The proposal highlights numerous innovative ideas that need support to bolster America’s housing industry, including more domestic manufacturing investment in the form of modular housing to produce apartment units in factories and ship them out across the country, as well as support for “mixed-income public development,” a financing program like Montgomery County’s.
Vice President Harris campaigned on passing this fund, doubling the size from $20 billion to $40 billion. But Donald Trump won the election, and his allies have talked about privatizing Fannie and Freddie. In the past, Trump has rallied against new housing, saying that further multifamily building would “abolish the suburbs.” That could limit this concept to cities and counties, but if it works, others will take notice.
The financing challenge that America’s housing industry faces demands to be met with the full force of the public sector’s balance sheet. Only then will we get the housing abundance we need.
