Housing is a critical component of community care for people with long-term mental illness. Without a place to live, the best mental health treatment and the most sophisticated rehabilitation services cannot be effective. The first phase of the deinstitutionalization movement, releasing large numbers of patients from the state hospitals and diverting admissions, has been successful. The second phase, providing for the needs of persons with mental illness in the community, has fallen short of its goal. Problems in achieving this goal have included the lack of program coordination; local problems with housing programs such as the chronic poverty of mentally ill persons; and misconceptions about the nature of mental illness. Adequate residential treatment programs for persons with mental illness should include affordable, low-income or subsidized housing; a location near support services and public transportation; a non-threatening community atmosphere encouraging independent living; and linkage to and availability of a range of services. The years to come promise to bring increased demand for services. State legislators will want to incorporate many different interests in their long-range efforts to solve the problem of housing for persons with mental illness. (Specific programmatic and legislative responses of the states are included.) (ABL)