A federal appeals court on Wednesday allowed the Department of Housing and Urban Development to move ahead, for now, with a $1.3 billion shift in homelessness grants toward transitional housing and stand-alone services. The three-judge panel’s court order stayed a lower-court judgment that had blocked the change, clearing a path for HUD to run its fiscal 2026 Continuum of Care competition while the underlying appeal remains unresolved.

The decision affects a program worth slightly more than $4 billion that supports housing and services through local governments and nonprofit providers nationwide. The First Circuit did not finally uphold HUD’s policy or decide every claim in the litigation. It concluded that the department had made a strong showing that it would likely prevail on a narrower question: whether the $1.3 billion set-aside required formal notice-and-comment procedures under federal homelessness law.

The distinction matters because the ruling changes what HUD may do immediately without ending the case. In its three-page order, the panel said HUD faced irreparable harm if the stay were denied because Congress gave the department until Dec. 1 to make the awards. As Reuters reported, the decision revives a national funding overhaul that states and housing groups say could destabilize permanent-housing projects serving tens of thousands of people.

What HUD is changing

The Continuum of Care program finances a local network rather than one federal service. Communities submit coordinated applications for permanent supportive housing, rapid rehousing, transitional housing, outreach and other services. HUD’s own program description says the grants are intended to rehouse people quickly, reduce the disruption of homelessness and improve access to mainstream services, with particular protections for people fleeing domestic violence and other dangers.

HUD’s fiscal 2026 funding notice reserves $1.3 billion for new transitional-housing and “supportive service only” projects. In its June announcement, the department described the change as a move toward treatment, recovery and self-sufficiency. It argued that long-running housing-first policy had not reversed rising homelessness and said a more competitive process would direct money to programs that pair housing with mental-health care, addiction treatment, job training and other services.

Housing first does not mean housing without services. The model generally places people in permanent housing without requiring sobriety, treatment participation or employment as a precondition, then offers voluntary support. Transitional housing is time-limited and can be structured around participation requirements. The dispute is therefore not simply housing versus treatment; it concerns which type of housing receives federal priority, how quickly existing grants can be displaced and how much discretion HUD has to change the competition.

Why the court granted a stay

U.S. District Judge Mary McElroy had ruled that the set-aside qualified as a “bonus or other incentive” under the governing statute and therefore required notice and comment. The First Circuit said HUD was likely to show that the phrase does not cover this set-aside. Judges Lara Montecalvo, Seth Aframe and Joshua Dunlap granted the stay on that basis and on the risk that a delayed competition would create funding gaps before the congressional deadline.

A stay pending appeal is provisional. It weighs the movant’s likelihood of success, potential irreparable harm and the competing interests while appellate review continues. The order means HUD can use the challenged notice during the appeal, but it does not erase the plaintiffs’ broader objections or guarantee that the policy will survive final review.

The litigation was brought by 22 states, the District of Columbia and a separate coalition of national organizations and local governments. Their case argues that the new competition would abruptly divert renewal money from established permanent-housing projects. A plaintiff summary estimates that programs housing at least 97,000 formerly homeless people depend on funds threatened by the restructuring. That estimate is an advocacy claim in active litigation, not a finding made by the appeals court.

The practical stakes for local providers

Local systems now face a compressed planning problem. Providers must prepare applications under HUD’s revived rules while the appeal proceeds, decide which existing projects can compete and determine whether transitional housing or service-only proposals can be launched without weakening current permanent-housing commitments. Awards made under the new notice could reshape staffing, leases and service contracts well beyond the Dec. 1 deadline.

The disruption risk is heightened because many permanent supportive-housing projects combine federal rent assistance with local case management and health services. Losing one component can threaten the viability of the entire arrangement. At the same time, HUD says the set-aside creates room for providers that emphasize treatment and employment services and subjects incumbent projects to more rigorous performance review.

The disagreement also reflects different readings of recent homelessness trends. HUD points to persistent increases as evidence that the existing funding balance has failed. Housing advocates counter that shortages of affordable homes and expiring rental assistance can overwhelm successful programs, and that rising homelessness does not by itself establish that permanent supportive housing is ineffective. The National Alliance to End Homelessness says the latest nationwide count found 745,652 people experiencing homelessness in 2025, while noting that HUD has not yet released 2026 data.

What the ruling does not settle

The First Circuit’s order resolves the immediate scheduling dispute, not the policy debate. HUD may proceed with the $1.3 billion set-aside, and communities must respond to the current competition unless another court order intervenes. The plaintiffs said they were evaluating further steps, including challenges to other elements of the funding notice.

The next consequential evidence will come from two places: the appellate court’s full treatment of HUD’s statutory authority and the allocation decisions made before Dec. 1. Those decisions will show how much renewal funding actually shifts, which permanent-housing projects lose support and whether new transitional and service programs can begin without creating gaps. For now, the ruling gives HUD operational control over the competition while leaving the final legality and real-world effects of the overhaul unsettled.