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October 2018

Housing affordability challenges prompt researchers to consider altering methods for measuring spending

Should housing affordability be assessed in a different way than the typical "30 percent" measure?

Researchers at The Harvard Joint Center for Housing Studies explored altering a widely used metric to better account for "notable changes" in various factors. The typical gauge has been based on allocating 30 percent of a household's income for shelter, a figure the Housing Center uses for analyses in its annual signature report, the State of the Nation's Housing.

"This reassessment is particularly appropriate given the notable changes that have occurred over the decades in the relative costs of food, clothing, and other necessities, the growth in the number and share of one- and two-person households, and the increased frequency of burdens among moderate-income households that may have enough money left over for non-housing essentials even after paying 30 percent of their income on housing," wrote the Center's Chris Herbert and Daniel McCue.

Herbert, managing director of the Joint Center; McCue, senior research associate and lead author of the State of the Nation's Housing reports; and Alexander Hermann, a research analyst, examined an alternative measure based on the concept of residual income. The substitute approach improves on the simple 30-percent standard by "estimating the cost of 'everything else' as a function of the number and ages of all household members. It then estimates how much income would be available to pay for housing if those other costs were fully covered," they explained.

The recently published JCHS working paper compared the housing-burden methods in three disparate metropolitan areas: Los Angeles, Phoenix, and Cleveland. Noting there were some large differences in family types and income levels within each metro, the trio of researchers reported the two measures produced very similar estimates of the rate and level of cost burden for each area as a whole.

In analyzing the two methods, the researchers identified the downsides of each and reported their exercise produced four major findings, which are explained in their 26-page working paper on measuring housing affordability.  

"Given the simplicity of the 30-percent standard, it remains a reliable indicator of affordability both over time and across markets," the paper states. Nevertheless, the researchers said the results also indicate "caution should be used in comparing affordability challenges across income levels or household types."

The Harvard Joint Center for Housing Studies provides research, education, and public outreach programs to help leaders in government, business, and the civic sectors make decisions around housing issues and policy.