Targeting Housing Production Subsidies: Literature Review

This report examines the current literature on rental housing markets and on housing policies for low-income renters in an attempt to answer a fundamental question. The question is what constitutes the most effective use of government subsidies that are made available for the production of rental housing. This discussion is not intended to be a continuation of the debate over whether demand or supply-side subsidies generally represent a better policy. Rather it starts from the premise that production subsidies are relatively better used in some circumstances than in others. Our objective is to identify those circumstances more precisely, so that government policy-makers and others can make good decisions about how to use the resources of housing production programs for low-income renters. To sharpen the question, the sponsor of this research, the Office of Policy Development and Research at HUD, has asked us to imagine that a new housing production program has just been created. How would we allocate that program’s resources: spatially (to types of housing markets or neighborhoods) or by types housing needed by different types of households? This literature review will stop short of suggesting an allocation formula or a list of eligible uses of funds. A subsequent report will suggest such elements of the design of a hypothetical program. The purpose of this review of the literature is to take a first step in that direction—to cull through the existing theory and empirical studies for the principles that would guide the decisions on the design of a program. The value of this examination of the best uses of production subsidies does not depend on the creation of a new housing production program. Resources to support the production of or reinvestment in affordable rental housing already exist, and decisions are being made every day about their use. State agencies are making decisions on how to allocate tax credits for the production of rental housing. City, county, and state agencies are making decisions on whether to use the HOME housing block grant for the production of rental housing and which projects to fund. State housing finance agencies are deciding whether to use their resources to provide new capital subsidies for particular housing developments built in the past with tax-exempt bonds. The federal government is making decisions about the future of housing developments for which long-term subsidy contracts are expiring. Public housing authorities are deciding whether and how to use the quota of demand-side vouchers that may be turned into supply-side, project-based subsidies. This report should help inform all of those decisions by laying out our current knowledge on when subsidies for the production of rental housing may be particularly valuable and when they should be avoided. (Authors)

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