In a 3-2 ruling, the high court gave the Council on Affordable Housing (COAH) five months to issue new regulations to determine how many affordable units towns must build.
"A remedy must be put in place to eliminate the limbo in which municipalities, New Jersey citizens, developers, and affordable housing interest groups have lived for too long," the court said.
The court upheld an appellate decision striking down a "growth share" formula the council approved in 2008, tying municipalities' affordable housing obligations to their rate of growth instead of factors such as the regional need for housing.
The New Jersey League of Municipalities and Gov. Christie had supported that approach, but proponents of affordable housing argued it allowed communities to skirt the requirements: If a town didn't grow, it didn't need to add affordable housing.
In its ruling, written by Justice Jaynee LaVecchia, the court said the growth-share approach failed to meet the standard set by the Mount Laurel case.
"Although that remedy imposed 30 years ago should not be viewed as a constitutional straitjacket to legislative innovation of a new remedy responsive to the constitutional obligation," the Fair Housing Act - passed by the Legislature after the Mount Laurel decisions - "remains the current framework controlling COAH's actions," the court said.
Justices Barry T. Albin and Ariel A. Rodriguez joined in the opinion. Dissenting were Justices Helen E. Hoens and Anne M. Patterson.
The ruling was seen as a win by affordable housing advocates who have battled with Christie over his attempts to gut the state agency that enforces court mandates on the housing towns must build.
The decision "is a tremendous victory for working families, people with special needs, and people who have trouble affording New Jersey's expensive housing market," Kevin Walsh, director of the Fair Share Housing Center, said Thursday at a Statehouse news conference. Representatives of the Housing and Community Development Network, the NAACP, and the Latino Action Network also applauded the ruling.
"There is no doubt this is an explicit rejection of the Christie administration's policies on housing," said Walsh, whose organization is based in Cherry Hill.
A spokesman for Christie said the governor had no comment on the ruling.
In a setback for Christie this year, the high court overturned his June 2011 decision to disband COAH, ruling that the governor had overstepped his authority. Christie also has tried to take money from affordable housing trust funds in communities that haven't moved forward with projects.
The rules the Supreme Court struck down on Thursday predate Christie's tenure, although he has advocated for local control in affordable housing decisions.
His administration defended the growth-share formula. In a brief filed in 2011, then-Attorney General Paula Dow described the formula as "consistent with the goals of affordable housing."
The New Jersey League of Municipalities also had supported the growth-share approach. The league "contends that binding COAH to the use of a nearly 30-year-old methodology is a mistake in light of changed circumstances," the court noted in the ruling.
The Supreme Court's 1975 Mount Laurel decision - a case that set national precedent - stemmed from a decision by Mount Laurel officials to forbid construction of garden apartments for poor black residents forcibly displaced by suburban housing. The court said developing municipalities like Mount Laurel needed to make housing available to low- and moderate-income residents.
In a 1983 decision, the court expanded the standard to include municipalities across the state. The Legislature then passed the Fair Housing Act in 1985, creating COAH.
The first two sets of rules passed by COAH for determining affordable housing requirements used a formula that took into account each municipality's projected growth and the number of existing and projected jobs in a municipality. Need for affordable housing was calculated regionally, with a "fair share" assigned to each municipality.
The growth-share approach, introduced in 2004, calculated municipalities' housing obligations based on growth within the community, requiring that one unit of affordable housing be built for every eight market-rate units and 25 jobs, ratios that were revised in 2008.
The approach had advocates. "A lot of people got thinking around that time it does make sense as towns grow they should have an obligation to address housing as they're growing," said Peter Kasabach, executive director of New Jersey Future, which promotes smart growth.
The problem, Kasabach said, is that the formula gave communities incentives not to build housing.
Though municipalities were assigned an affordable housing obligation, "you didn't actually have to do any units unless you grew," he said.
As a result, the affordable housing system "is a mess," Kasabach said. "The hope is that the Governor's Office, the administration . . . will say, 'Let's put the rules in place that meet these requirements and get back to business.' "
Messages left with COAH and a Department of Community Affairs spokeswoman were not returned Thursday.
Though it struck down the growth-share formula, the court's ruling did not preclude the Legislature from changing state law to allow the approach.
"New Jersey in 2013, quite simply, is not the same New Jersey that it was in 1983," the court said. "Changed circumstances may merit reassessing how to approach the provision of affordable housing in this state."
In a statement, the League of Municipalities noted that the court had made it clear that the Legislature could authorize "new avenues for addressing regional need and promotion of affordable housing."
The decision "underscores the need and presents the opportunity for the administration, the Legislature, and municipal officials to partner and craft a reasonable, fair, and achievable housing policy," said league president Janice S. Mironov, mayor of East Windsor Township.