Better Data And Measures Needed To Understand Housing Needs

Often, cost burden data confuses rather than clarifies demand for affordable housing solutions.

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This month I’m going to touch on some persistent problems with the way we talk about housing in the United States and how we try to address housing issues. The first one is the idea of cost burden, the amount that a household pays for housing above 30 percent of its pre-tax, gross household income. This Housing Cost Income Ratio (HCIR) is still the way everyone from activists to elected officials and members of the media talk about housing cost issues. And every year the National Low Income Housing Coalition (NLIHC) releases a report about the relationship between rents and wages. This year’s report, Out of Reach 2025: The High Cost of Housing, is another example of use of the ratio, when it’s misused, is at best unhelpful and at worst adds to problems in the way we address the challenges that many families pay for the housing costs.

First, the way we talk about affordability and the way we try to measure it forms the base calculation for every approach to trying to achieve it. Something’s affordability is not a quantitative measure but rather a qualitative one, a measure of relationship to price. Like height or weight or the weather, affordability requires answering the question, “compared to what?” Two people might be paying $1000 a month for an apartment with one struggling to make rent each month and the other not even thinking about it. The ratio of income to rent is a place to start to calculate that.

Historically, the ratio began with the notion that housing should cost one week’s wages, roughly 25% of monthly income, then it was increased in the late 1970s to 30%. Why was this chosen? I’ve been writing about this for years. The measure is completely arbitrary. There simply isn’t any longitudinal study that has established the “rule of thumb” ratio of 30% as truly being affordable. The closest anyone has come to better understanding the relationship between what a household has to spend on essentials, including housing, is Michael Stone’s residual income model, a measure that looks at housing costs after all other essential items have been paid for. Harvard’s Joint Center for Housing Studies recently rebooted the idea that even if a family might be paying 30% of pre-tax, gross income on housing, they still might be struggling.

This is not an academic point. Use of the ratio to determine subsidies for housing drives housing policy and finance but it is not sensitive at all to other costs faced by households that compete for paying for housing. The measure itself doesn’t account for taxes, a significant portion of what a working household pays each month. While many of those households recover those taxes taken out of regular paychecks when they file their taxes and get refunds, that doesn’t help offset the costs now. Daycare, food, transportation, and medical bills can consume enough household income to push families into negative income, increasing debt and creating financial insecurity.

This brings us back to the Out of Reach report. In a nutshell, the report rings the alarm bell every year pointing out that the minimum wage in the country is too low to support a person renting a two-bedroom apartment. The study takes the average rent of a two-bedroom apartment and suggests what the wage would need to be for a person to pay that rent. From this year’s assessment: “This year’s Housing Wage is $33.63 for a modest two-bedroom apartment, which is more than four times the federal minimum wage of $7.25 per hour.” To anyone paying attention, this measure is ridiculous and obviously a set up to demand something to address this yawning chasm for a person trying to rent a two-bedroom apartment. Forget the question of why a person earning minimum wage needs to rooms, it’s just a “crisis.” What’s the best way to address this problem? More money of course.

But the Department of Housing and Urban Development alone spends over $70 billion per year on housing and that doesn’t include more than $13 billion in tax credits for housing. Take that $83 billion and divide it among half of the nations 45 million renters and it would be about $300 per month, probably enough, on average to resolve most cost burden issues. Obviously, a shift to more direct subsidies would take time and work. But cost burden data being overstated, then deployed to push for more of the same kind of spending, is not only dishonest but it does nothing to address the real issue for people at the bottom of the economy: “Where will I find money to pay the rent next month?”