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When the Rent Eats First From Incomes Large and Small, Is the Traditional Measure of Cost Burden Still Useful?

Image of three-story townhouses.The residual income approach, which accounts for the amount of money a household has left over after paying for necessary expenses, may be a more useful measure of housing affordability than the traditional percent-of-income measure.

The 30 percent measure of housing affordability, a longstanding guideline in both public policy and academic circles, posits that a household is cost burdened if it spends more than 30 percent of its income on housing costs. The percentage-of-income measure of housing affordability was enshrined as federal policy with the passage of the Brooke Amendment to the Housing and Urban Development Act of 1969, which capped rent in public housing at 25 percent of a tenant’s income, and it remains central to HUD’s definition of housing affordability to this day. In 1981, this rent cap was raised to 30 percent. However, despite — or perhaps because of — its longstanding use in public policy and research, the traditional 30 percent affordability measure has been the subject of criticism and debate, and researchers have proposed several alternative measures of affordability.

In October 2020, Harvard University’s Joint Center for Housing Studies (JCHS) sponsored “The Rent Eats First: Using Residual Income to Measure Rental Affordability,” a webinar that addressed recent research into one such alternative measure of affordability for renter households, the residual income measure. Following his introduction by JCHS deputy director David Luberoff, senior researcher Alexander Hermann presented the methodology and findings of research conducted along with Whitney Airgood-Obrycki and Sophia Wedeen. Hermann compared the relative strengths and weaknesses of the two measures of rental affordability, discussed the paper’s most relevant findings, and made some policy suggestions based on researchers’ simulations.

The Residual Income Burden

Hermann explained that the residual income model, much like the traditional 30 percent model, considers housing costs to have primacy because, as Evicted: Poverty and Profit in the American City author Matthew Desmond puts it, “rent eats first” — meaning that housing costs typically are fixed and must be paid before all other expenses. “There is no wiggle,” elaborated Hermann, “you can consume less food or less transportation, but it’s hard to consume less housing.” Housing costs also tend to be the largest expense for renter households.

Determining cost burden by residual income therefore involves examining what a household has left over after all necessary expenses have been paid. The researcher begins with a household’s total annual income and then subtracts annual housing costs to reveal the “residual income” left over. The researcher must then estimate other essential yearly costs and determine whether that residual income can cover them. If the residual income is sufficient, leaving the household breaking even or with money to spare, all is well. If a residual income deficit exists, the household is “residual income burdened” and must make up the gap by going without some other necessity such as food, health care, or transportation. The concept of residual income burden was pioneered by University of Massachusetts Boston researcher Michael Stone.

Compared with the traditional cost burden measure, Hermann admitted, the residual income measure is nonintuitive, difficult to calculate, and data intensive. It is, however, more sensitive than the traditional measure, because it considers factors such as household size and composition as well as local variations in nonhousing costs.

Methodology

Airgood-Obrycki, Hermann, and Wedeen used two primary data sources to produce a sample of renter households and their average yearly expenses by household type and composition.

To gather household data, including county of residence, number and age of members, yearly gross income, and yearly rental expenditure, the authors used the U.S. Census Bureau’s 2018 American Community Survey (ACS). They selected households that contained some mix of one or two adults between the ages of 18 and 64 (working age) and anywhere from zero to four children and eliminated households with seniors, three or more adults, and five or more children due to the disparate spending needs of these populations. After eliminating these groups, the sample captured data representing approximately 71 percent of renters in the United States. The researchers broke the sample down into four basic household types: single adult, single parent, two-parent household, and two-adult household with no children.

To estimate nonhousing expenditures for each type of household, Hermann explained, the research team used the Economic Policy Institute’s Family Budget Calculator. This calculator estimates household expenditures for every county in the United States in seven categories: transportation, health care, food, child care, taxes, other necessities, and housing. The Economic Policy Institute bases its estimates on what households require for a “modest yet adequate” standard of living and produces budgets that provide for basic material needs but do not include savings or discretionary spending such as vacations. The researchers used six of these categories, eliminating the housing category in favor of the ACS data, and adjusted four of the categories to better calculate results by household type.

After combining their custom datasets, Hermann and his coauthors were able to use mathematical modeling to determine how many households were residual income burdened. By breaking their sample down by income range and household type, the authors discovered additional patterns.

More Renter Households Struggling More Severely?

The researchers found that, in their sample population, 62 percent, or 19.2 million households, had residual income burdens compared with 48 percent, or 14.8 million households, with traditional housing cost burdens. Among traditionally burdened households, 94 percent had both burdens. Only about 942,000 households paid 30 percent or more of their income on rent but had enough money to pay for all other necessities, and these tended to be households without children. Hermann theorized that these households could afford to make tradeoffs and spend more on housing and less on other necessities.

A gap of 14 percentage points between the traditional cost burden measurement and the residual income burden measure may indicate that American renters are faring worse than conventional measurements would indicate. Hermann added that this gap is the result of comparing average conditions; when he and his coauthors examined smaller populations — for example, specific income bands or household types — the disparity in the measurements grew starker. Burdens were highest for households with children, and the measurement gap between systems was also highest for this demographic. This finding suggests that the traditional measure of cost burden fails to capture how many of these households are struggling. The researchers also found that residual income burdens are virtually universal for households earning less than $30,000 per year.

Future Policy Measures

Hermann concluded his presentation with a brief discussion of some of the simulations that he and his coauthors ran to test the possible impacts of various government subsidies, including a rental subsidy for all households that meet the traditional definition of cost burdened. Because their statistical model considers seven spending variables, the team was able to experiment with several interventions. “Ensuring everyone has access to a comfortable standard of living is a policy goal worth pursuing, and housing assistance is one of the important mechanisms by which you can start to make inroads there,” Hermann said. Considering the income deficit that many renter households face, there is room for what Hermann calls “bigger picture” thinking.