AbstractWith the advent of the “crack” epidemic and the concurrent decrease in available foster homes for young children, the placement of infants and toddlers in residential congregate care settings has resurfaced in some of the larger urban areas of the United States. Despite the controversy surrounding this type of placement, current research on congregate care settings is almost nonexistent. The present study examines the congregate care facilities that were established in an urban area in the mid‐Atlantic region of the United States, as a response to the placement crisis for young children in foster care. In addition, the study compares the development of a group of children placed in these settings with a group who were placed in foster home settings. Findings suggest that congregate care facilities differ in their appropriateness for young children based on the number of children in the home and the practice philosophy of the group home. The study documented that children reared in foster family homes fared better than their group‐reared counterparts on a variety of variables, including mental development and adaptive skills. In contrast, children reared in congregate care facilities were similar to foster home‐reared children regarding observed and reported behavior problems. Implications of these finding for policies and practices related to congregate care placements are discussed. ©2002 Michigan Association for Infant Mental Health.