Sustainable, mixed-use, walkable neighborhoods are the future of American housing—if we can harness the support that is needed across public and private channels.

Human settlement patterns as a whole play a large role in energy consumption, and therefore in sustainability. For example, since residents of New York City live closer together, use transit, and rarely drive cars, they use about one-third of the energy of the average American. Chicago residents use about half the energy per capita, for the same reasons. Any compact, well-connected, and walkable neighborhood with amenities such as shopping will tend to outperform a neighborhood that is auto-dependent. Yet, government programs tend to encourage development of the latter, and in some instances, they actually obstruct or undermine environmental performance—to the detriment of the community.

Before World War II, traditional Main Streets were the norm, with urban thoroughfares composed of a mix of retail and housing. These developments were common partly because lenders appreciated that risk was spread over the types of real estate. A flower shop with an apartment above, for example, provided two sources of income. One might perform well when the other did not. However, with the growth of federal housing initiatives in the 1930s and the creation of the Federal Housing Administration (FHA) in 1934, this regulatory stance changed. Today, the FHA, Fannie Mae, and Freddie Mac mortgage programs look at these traditional districts as adding risk. This signals to investors and developers that if you want financing, stick to single-use structures. This has to change by 2020 in order to facilitate more efficient, sustainable growth patterns.

Currently, the FHA, Fannie Mae, Freddie Mac, and the U.S. Department of Housing and Urban Development’s Section 221(d)(4) and Section 220 programs all cap a mixed-use development’s commercial component at a small percentage of the gross floor area/net rentable space, or the gross income derived from a given project. Combined with the even-more-restrictive policies of private lenders, almost all of America’s pre–World War II Main Streets, as well as newer forms of live–work units, are excluded from the secondary mortgage markets and HUD’s capital program for rental housing.

The market will drive this to change. The evolution in demographics and consumer preferences over the last decade have created greater demand for walkable, urban real estate in communities with mixed residential and commercial uses, and this demand will continue. Arthur Nelson, a presidential professor in the University of Utah’s City & Metropolitan Planning department, estimated in a 2007 article, “The Next One Hundred Million,” that the current supply of unattached single-family housing already exceeds projected demand and will continue to do so until 2037. Further analysis by Nelson indicates that as the glut of large-lot homes continues to flood the market, the demand for smaller housing in walkable, traditional neighborhood settings will increase substantially and consistently. A 2012 Brookings Institution study—“Walk this Way: The Economic Promise of Walkable Places in Metropolitan Washington, D.C.” by Christopher Leinberger and Mariela Alfonzo—highlighted the economic appeal of amenity-rich, walkable, convenient communities, and a New York Times review of the study’s findings noted that “each step up the walkability ladder adds $9 per square foot to annual office rents, $7 per square foot to retail rents, more than $300 per month to apartment rents and nearly $82 per square foot to home values.” Given this stronger appeal, walkable, mixed-use urban development does not appear riskier than single-use developments. And by 2020, those programs that do not foster mixed-use will likely be considered more perilous.

By 2020, current federal housing finance regulations will need to be updated to reflect more current market conditions. And that work is already underway.

Since 2010, through its Live/Work/Walk: Removing Obstacles to Investment initiative, the Congress for the New Urbanism (CNU) and its allies have been advocating for the FHA, Fannie Mae, and Freddie Mac to revise the regulations on the amount of commercial space allowed in mixed commercial–residential areas. On Sept. 13, 2012, in HUD Mortgagee Letter: 2012-18, the FHA increased the cap of commercial space in mixed-use condo buildings from 25 percent to 35 percent, with possible waivers for developments with up to 50 percent commercial space.

CNU holds high hopes that Fannie Mae, Freddie Mac, and HUD’s 221(d)(4) and 220 programs will follow this FHA action. This will help developers and builders better meet current and future market preferences.

Housing finance reform coupled with better transportation policies—such as those in Vancouver, British Columbia, where no freeways exist within city limits—will build value for the United States economy. Recently, the Federal Highway Administration embraced the “Designing Walkable Urban Thoroughfares: A Context Sensitive Approach” guide produced by CNU and the Institute of Transportation Engineers. This empowers traffic officials to build streets that create walkable communities—places that people want to live. By 2020, the growing demand for this type of development will surely push the market and the government to change direction and level the playing field.