Thirteen new homes will be built in an $8.9 million project at Raymond Terrace, after a land deal was struck for "social and affordable housing".
Homes NSW - the state agency for housing and homelessness - will provide the land, which presently houses three old dwellings.
The project falls under a Minns government policy, called "direct dealing", which enables exclusive access to projects for community housing providers.
The non-profit Hume Community Housing will receive a $1.5 million grant from the federal government's "Social and Affordable Accelerator Fund" for the project.
The $2 billion fund plans to provide new and refurbished social homes across Australia, with $610 million for 1500 homes in NSW.
Hume will manage the Raymond Terrace project, with six two-bedroom homes and seven townhouses to be built.
The project comes amid a housing and homelessness crisis felt across the nation.
The Newcastle Herald reported in May that an estimated 35,000 people were homeless in NSW.
The Hunter waiting list for social housing in January was 5520.
Hume has lodged a development application with Port Stephens Council for the Raymond Terrace project.
Port Stephens MP Kate Washington said the project was "desperately needed".
Ms Washington added that it was "the biggest investment in social housing in Port Stephens for more than a decade".
NSW Minister for Housing and Homelessness Rose Jackson said the project would help address the Hunter's housing needs.
Federal Paterson MP Meryl Swanson said it was a "step toward addressing the housing crisis for people in need."
Hume chief executive Brad Braithwaite said the organisation was investing its "cherished reserves" in the project.
A government statement said Hume would manage the "affordable and social homes", with the social homes to be "owned by Homes NSW".
"We see it as a model with great potential for providing more significant and diverse housing solutions at scale for this region in the future," Mr Braithwaite said.
"This is a relatively small pilot project, but we are very hopeful that from little things big things come."
