Obama used his weekly radio address to announce the selection.
"As commissioner of housing preservation and development in New York City, Shaun has led the effort to create the largest housing plan in the nation, helping hundreds of thousands of our citizens buy or rent their homes," Obama said.
He said HUD is essential in the effort to address the mortgage crisis, which he said "not only shakes the foundation of our economy, but the foundation of the American Dream."
"To stem the rising tide of foreclosures and strengthen our economy, I've asked my economic team to develop a bold plan that will dramatically increase the number of families who can stay in their homes," Obama said. "But this plan will only work with a comprehensive, coordinated federal effort to make it a reality."
Donovan has experience working in business, academia and at HUD during the Clinton administration.
"Trained as an architect, Shaun understands housing down to how homes are designed, built, and wired," Obama said.
Shaun Donovan has been chosen to lead the Department of Housing and Urban Development.
"He knows that we can put the dream of owning a home within reach for more families, so long as we're making loans in the right way, and so long as those who buy a home are prepared for the responsibilities of home ownership," Obama said.
The president-elect noted that jobless claims neared a 30-year high last week and that "one in 10 families who owns a home is now in some form of distress, the most ever recorded."