To amend part A of title IV of the Social Security Act to establish a demonstration program to test whether the net costs incurred in making emergency assistance payments to homeless AFDC families for temporary housing can be effectively reduced through the construction or rehabilitation (with Federal assistance) of permanent housing that such families can afford with their regular AFDC payments.

Amends part A (Aid to Families with Dependent Children) (AFDC) of title IV of the Social Security Act to establish a program providing grants to States selected to conduct demonstration projects testing whether AFDC housing costs can be reduced by constructing and rehabilitating permanent housing for rental to AFDC recipients who would otherwise require AFDC emergency assistance in the form of temporary housing. Provides that, to be eligible for selection as one of three States authorized to conduct such a project, a State must: (1) be currently providing AFDC emergency housing assistance; (2) have an acute need for Federal assistance by virtue of the large number of homeless AFDC families, and shortages of low-income housing, in the jurisdiction(s) where such project would be conducted; and (3) submit a plan to achieve significant cost saving over a ten-year period through the conduct of such project.

Requires that such grants be used to provide permanent housing which is: (1) owned by the State, an instrumentality of the State, or a nonprofit organization; (2) available to families who have been unable to find decent housing at rents that can be paid with AFDC aid for shelter; and (3) located in jurisdictions experiencing a critical shortage of such housing. Requires that: (1) the most costly temporary housing be retired from use in the emergency assistance program as permanent housing becomes available for occupancy, unless temporary housing is demonstrably needed; and (2) the costs of providing permanent housing be lower than costs which would be incurred if, instead, the State made AFDC emergency assistance payments providing temporary housing.

Sets the State contribution to the cost of constructing or rehabilitating such housing at at least the current State AFDC share increased by ten percent. Authorizes appropriations for the grant program for each of the first five fiscal years following FY 1988.