Public Investments in Starter Home Development

In order to address the severe shortage in starter-home development, and the lackluster rebound of new for-sale housing development following the Great Recession, some communities have turned to direct public investment to spur the development of new starter homes. These public investments can take different forms but generally act as an incentive or a subsidy to a homebuilder and developer to build new homes, for sale, at a price affordable to households making the median income in a region or less.

Investments in starter home development often look different than investments in affordable apartments for-rent. That’s because while apartments require rents that cover the ongoing cost of operations and maintenance — and ongoing subsidy if those rents are less than that ongoing operations and maintenance — homes built for-sale only require an up-front subsidy to cover the difference between the cost of land, labor, and materials and the cost that a new homebuyer can afford for that house. In the case of public investments to spur starter home development, this gap between the cost of construction and the affordable sales price could be even smaller, as the public incentives encourage smaller homes that simply cost less due to their construction and square footage.

Public investments in starter home construction can address many of the constraints associated with new housing developments, including:

• The high cost of land, by providing publicly-owned land for development at a discounted cost;
• The high cost of construction loans in the current interest rate environment, by providing below-market rate construction loans, repayable at closing;
• The high cost of predevelopment, by providing grants or repayable loans for land acquisition, engineering studies, infrastructure construction;
• The cost of public permits, including fees for plan reviews, building inspections, occupancy, HVAC, electrical, plumbing, water, sewer and other impact fees, by providing grants or repayable loans to cover the cost of such fees;
• The onerous restrictions on where and whether smaller homes on small lots are able to be built, by reforming land use restrictions; and
• The high cost of delays and the time-cost of money, by streamlining and reforming permitting processes and inspections to increase the speed at which permits are issued.

The two case studies described below use some combination of all of these different forms of financial assistance. Specifically, the Utah Homes Investment Program provide below-market rates loans, sometimes paired with state-owned land. While the Next Generation Housing Initiative in Washington County, WI provides funding opportunities for both predevelopment costs, infrastructure construction, and for the cost of core construction permit fees.

In order to provide the financial opportunities, these programs relied on a variety of funding sources. In Utah, the state appropriated $18 million to cover the lost interest earnings for the Utah Homes Investment Program when the funding was reallocated from the Utah Department of Transportation Infrastructure General Fund.

In Washington County, WI, the county used federal made possible by the American Recovery Plan Act (ARPA) to provide an incentive for development costs of up to $20,000 and a permit fee incentive up to $6,000 per owner-occupied dwelling unit. The $20,000 investment acts as a 0% loan to the builder or developer. When a development is located within a Tax Increment Financing (TIF) district, a portion of the increment can be used to repay the incentive. Other communities could turn to ballot measures, tax abatements, housing accelerator funds, philanthropy, or housing trust funds as sources of capital for homeownership subsidies.