A paper from the Harvard University Joint Center for Housing Studies (JCHS), Measuring Housing Affordability: Assessing the 30 Percent of Income Standard, compares two different measures of housing cost burdens: the common 30% housing cost-to-income ratio and the residual income approach. The paper finds that the two measures produce similar metropolitan area-wide rates of cost burden overall, but the 30% standard significantly underestimates cost burdens for the lowest income households and families with children and overestimates cost burdens for higher income households and single-person households.
The widely used 30% housing cost-to-income standard assumes that households will have difficulty affording other necessities if they spend more than 30% of their income on housing costs. This assumption, however, has two problems. Non-housing living expenses vary with the number and ages of household members, and most necessary household expenses do not rise with income. Therefore, larger families with children and those with extremely low incomes often can’t afford to spend as much as 30% of their incomes on housing without sacrificing other necessities, while small households and those with higher incomes can spend more than 30%. The benefit of using this standard, however, is that data on housing costs and household incomes are readily available for every jurisdiction across the country.
The residual income approach to measure cost burdens subtracts necessary expenses like food, transportation, health care, childcare, taxes, and savings from the householder’s income to determine the remaining income available for housing. If housing costs exceed the amount left over (“residual income”), then the household is considered housing cost-burdened, or “shelter poor.” Residual income, or the amount households can afford to pay for housing, varies by household composition and income level. The dilemma with this measure, however, is that data are more complex and difficult to locate for every jurisdiction.
The JCHS paper compares both affordability measures across three metropolitan areas with housing costs varying from high to low—Los Angeles, Phoenix, and Cleveland. Overall, the two approaches produce similar metropolitan area-wide cost burden rates. The residual income approach, however, produces higher cost-burden rates for the lowest income renters and lower rates for the highest income renters when compared to the 30% housing cost-to-income standard. For extremely low income renters (those earning less than 30% of area median income), rates of cost burden under the residual income approach were 10 to 19 percentage points higher than under the 30% standard. In fact, extremely low income renters in the three metropolitan regions had no income remaining for housing costs after paying for other household necessities, regardless of household size. The residual income approach reveals lower rates of cost burdens for single-person households, except for the lowest income individuals, and higher rates for families with children for all income levels, likely due to the high costs of childcare.
The 30% standard provides a reasonably accurate depiction of housing cost burdens, but other measures and data can clarify housing cost burdens when crafting policy. While the residual income approach potentially offers a more precise estimation of who experiences housing cost burdens, the approach can be difficult to use due to limited data and is still not precise, because costs of food, healthcare, and other necessities vary greatly by households of similar incomes and composition. Some families with children, for example, may have childcare expenses, while other families with similar incomes may rely on relatives or friends for free or less expensive childcare.
Measuring Housing Affordability: Assessing the 30 Percent of Income Standard is available at: https://bit.ly/2OuOEVW