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Rental Burdens: Rethinking Affordability Measures

Exterior image of Brooklyn brownstone townhomes with gated entrances from the sidewalk.
In cities like New York, households often face considerable rental burdens and high costs of living.
How much of your income should you set aside for rent? With the cost of housing on the rise, researchers are reexamining the 30-percent rule of thumb for measuring rental burden.

In July 2014, the Joint Center for Housing Studies of Harvard University released a study finding that nearly half of all renter households in the United States were cost burdened in 2012. This interactive map shows that people living along the east and west coasts and in urban areas bear the greatest cost burdens. HUD defines cost-burdened families as those “who pay more than 30 percent of their income for housing” and “may have difficulty affording necessities such as food, clothing, transportation, and medical care.” Severe rent burden is defined as paying more than 50 percent of one’s income on rent.

The 30-percent rule — that a household should spend no more than 30 percent of its income on housing costs — has long been accepted in academic circles and is often included in blogs and websites on family budgeting. A recent Business Week article, however, argues that the 30-percent rule is “nearly useless.” The authors suggest that calculating housing cost burden using only income ratios oversimplifies the issue of housing affordability. Frank Nothaft, chief economist at Freddie Mac, is quoted in the article as saying, “If your income is $500,000 a year, you can pay 40 percent and still have money left. But if your income is $20,000 a year, it will be hard to make ends meet if you’re paying 30 percent of your income on rent.”

As living costs increase, does the 30 percent rule accurately measure rental affordability?

The Brooke Amendment

The 30-percent rule for measuring affordability can be traced back to an amendment passed in 1969 by Senator Edward Brooke, the country's first popularly elected African American senator and a vocal advocate of affordable housing. He and then-Senator Walter Mondale coauthored the 1968 Fair Housing Act, which prohibits housing discrimination on the basis of race.

The Brooke Amendment, which was passed in 1969 as a response to rent increases and complaints about services in public housing, capped public housing rent at 25 percent of a resident’s income. Representative Barney Frank recounted that “[the amendment] said originally that the poorest of the poor who get housing through various public programs shouldn’t be expected to pay more than 25 percent of their income for housing, precisely because they have so little.” Congress raised the cap to 30 percent in 1981.

Measurement Differences

In discussing the rental affordability measurement to Business Week, David Bieri of the University of Michigan states that the 30-percent rule “[is] essentially an arbitrary number.” One of the arguments against the share of income approach is that different households earning the same annual income spend considerably different amounts of money on basic necessities. For example, families with children spend more on clothing, food, and medical bills than do single adults. Thus, a household with children that spends 50 percent of its income on housing might be cost burdened, whereas a single adult who earns the same salary and spends the same percentage of income on housing might not be. In addition, the share of income measure does not consider cost-of-living differences in areas where housing is expensive. Consider a very low-income family in New York City that earns approximately $22,100 a year, or 30 percent of the area median income according to the Furman Center. If 50 percent of the family’s income is dedicated to rent, the family has only about $200 per week left to cover all other basic expenditures, including food, clothing, medical costs, and transportation.

Another concern about the share of income measure is that it does not take into account the tradeoffs families make to reduce housing costs. A family may choose to live in a poor-quality home, in a crime-ridden area, or a long distance from work opportunities to reduce housing costs. According to a study by the Joint Center for Housing Studies, “[t]hese added costs [of tradeoffs] are not now captured by the simple approach of measuring only the share of income households spend on their housing.”

Even if percentage of income were considered an adequate means of measuring affordability, the research is inconclusive on which inputs should be used to calculate the affordability ratio. The surveys used for measuring rental burden are often self-reported measures of income and expenses, including rent and utilities. Underreported income, as well as the difference between pretax and posttax income, can have an adverse impact on the data. In their analysis of American Housing Survey data, Frederick Eggers and Fouad Moumen note, “Low-income households, in particular, often have large year-to-year swings in income.” Without accurate and consistent data on income and expenses, the share of income measure of rental burdens can inadequately represent the problems poor families face.

The Affordability Problem

Regardless of the means of measurement, the rental affordability problem is evident across studies. Wages are not increasing at the same rate as housing costs, and rents continue to increase. Bloomberg Businessweek finds that since the recession, affordability has increased for homeowners but not for renters. According to Governing, wages have not kept up with increased housing costs in states such as California, Florida, and Michigan. The imbalance between the demand for affordable housing and the supply of low-cost rentals can be seen in metropolitan areas across the United States.

Cities with considerable rental burdens such as New York and San Francisco are also places with a high cost of living. According to the New York Times, “someone making $70,000 a year in other parts of the country would need to make $166,000 in Manhattan to enjoy the same purchasing power.” Michael Stone of the University of Massachusetts Boston coined the term “shelter poverty” to describe the condition of people who are forced to cut back on basic needs because of the cost of housing. Rather than measuring affordability using a rent-to-income ratio, Stone proposes a residual income approach, which measures cost burden by calculating the money a family has left for housing after other expenditures such as food, clothing, medical costs, and school fees are taken into account.

Data from the American Housing Survey and the American Community Survey indicate that severe rental burdens disproportionately impact poor families. The Worst Case Housing Needs surveys the number of very low-income families (those earning less than 50 percent of the area median income) who pay more than half their income in rent, have substandard housing conditions, or both. In 2011, more than 72 percent of families with severe housing problems and severe rental burdens were in the bottom 30 percent of the median income bracket. Eric Belsky, Jack Goodman, and Rachel Drew compared surveys of affordability and found that “irrespective of the dataset used, renters in the bottom quintiles account for at least 85 percent of severely cost burdened renters.”

The Brooke Amendment, and the 30 percent rule in general, are meant to protect low-income households from extreme rental costs. High housing costs and high prices for basic necessities place a greater burden on poor households living in metropolitan areas. Measures of affordability should be reassessed to ensure that policymakers are decreasing rental burdens for poor households.

Do you qualify as rent-burdened according to the 30-percent rule of thumb? Find out what your monthly rent should be according to the 30 percent rule with the Housing Connections rental calculator.