1.3 How to Create it
How Is Affordable Housing Created?
There are two types of affordable housing: (a) dedicated affordable housing for low- and moderate-income households and (b) market affordable housing. Dedicated affordable housing is housing that comes with legal restrictions that ensure the rents or home prices are affordable to people with qualifying incomes. Market affordable housing is housing that rents or sells at affordable levels without explicit government subsidies. Localities will need ample supplies of both types to meet their residents’ housing needs.
Watch this video on how affordable housing is created.
We emphasize the two types of affordable housing to underscore the importance of focusing both on government action to create housing for low- and moderate-income households and a well-functioning private market producing an ample housing supply, such as adopting inclusionary housing policies. We’ll focus more on the role of the private market and the overall housing supply later in this training, as it is important to understand how housing prices are affected by supply and demand.
(a) Dedicated Affordable Housing is generally created by layering different government financing sources with debt supported by expected future rents. In other cases, a government requirement or incentive substitutes for or supplements direct government subsidies. Various financial layers can include federal tax credits, tax-exempt bonds and grant programs, state tax credits and grants, local funding through a housing trust fund, and charitable donations. These are only some of the many funding sources that are often compiled to support dedicated affordable housing.
In addition to ensuring financing, other actions are also needed to support the development of dedicated affordable housing, including: policy advocacy by stakeholders, policy creation and implementation by local officials, and financing of the development by financial institutions.
(b) Market Affordable Housing developments are often older buildings that have become more affordable over time as newer development has come online and become preferred by renters or owners. Market Affordable Housing may also differ from higher-priced housing based on the location, quality, size, available amenities, and housing unit type, which often affect a property’s rent or sales price. The overall levels of demand and supply also play a role in determining whether private market units are affordable and to whom.