Housing, Affordable

Measuring Housing Affordability

People measure housing affordability by the ratio of household income to the cost of available housing. For more than a century, the recommended standard for housing affordability was that households should spend no more than one-fourth of their income for shelter expenses. This ratio dates back to the writings of economist Ernest Engel. Using analysis of a survey of Belgian working-class families conducted in 1857, Engle proposed an economic law stating that the ratio of a household's income spent for housing is constant regardless of the household's income. Engel's law focused on food as the most essential expenditure within a household. Of necessity, food costs would vary depending on the number and age of people in a household and the ability to self-provision through foraging, hunting, gardening, or raising of livestock while the housing cost could remain constant even when household composition changed. The rule of thumb that emerged from this perspective was “one week's wage for one month's rent.” This ratio could be readily applied in decision making for minimizing risk in renting an apartment or granting a mortgage to a given household. This ratio remained the norm until the mid-1970s.

Critics of Engel's economic law have proposed other measures of affordable housing. As early as 1868, other economists critiqued Engel's work. Herman Schwabe, for example, published detailed research on housing expenditures within the household budget. His research on wages and rent indicated that as income rose, the percentage of income spent on rent fell. Schwabe proposed an alternative economic law stating that the poorer the household, the greater the proportion of income must be spent on housing.

More recent critics of Engel's economic law note that over time, consumers' shifting expectations regarding their housing have also affected household consumption patterns. They propose that the proportion of income spent on housing would have increased over time as other costs have decreased and as housing expectations have increased.

Focusing on income as the primary factor in determining housing cost burdens fails to account for variability in households. Housing costs affect households with equal incomes differently depending upon the size of the households. A household with seven members has different needs than a single individual for food, clothing, transportation, medical care, and other basic necessities. In 2001, the average annual expenditures from the Consumer Expenditure Survey found that one-person households spent on average $1,477 for food at home, while five or more person households spent $5,111. One alternative means of measuring housing affordability would take household size and composition into account and base a recommended budget guideline for housing affordability on actually household expenditures. The U.S. Bureau of Labor Statistics (BLS), for example, has established typical household budgets based on their annual Consumer Expenditure Survey. In 2001, the typical family spent about 33 percent of their gross income on housing, 11.2 percent for food, and 3.5 percent for clothing. The use of a housing affordability standard based on BLS budgets is in contrast to measures based on the Census Bureau's Federal Poverty [Page 263]Threshold levels. Social Security Administration economist Mollie Orshansky developed the poverty threshold levels in 1963 and 1964 using the Department of Agriculture's Economy Food Plan adjusting for family size. The limitation to affordability standards based on poverty levels is that these were not established as inclusive standard budgets of goods and services meeting minimum annual needs for a family of a particular size and composition. With the exception of food, acceptable standards for major consumption items were not available at the time the poverty threshold levels were established.

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