Affordability

In the United States and other countries around the world, housing affordability is one way to measure economic standards of living. A variety of measures can be used to define housing affordability, including housing expenditure-to-income ratios, living wages, ability to qualify for mortgage loans, residual income approaches, general market approaches, housing affordability based on environmental and other factors, and so on. Even though no consensus exists on how best to measure housing affordability, the approach many government officials, researchers, advocates, mortgage lenders, and property managers have adopted has been to gauge affordability based on housing expenditure-to-income ratios. Housing affordability is used by policymakers, housing researchers, mortgage lenders, and others in a variety of ways, including (a) to describe household expenditure, (b) to analyze trends, (c) to administer public housing by defining eligibility criteria and subsidy levels, (d) to define housing need for public policy purposes, (e) to predict the ability of a household to pay the mortgage or rent, and (f) as part of selection criteria in the decision to rent or provide a mortgage.

David Hulchanski contends that the 30% rule of thumb has become the method of measuring housing expenditure-to-income, but it is based on practice and experience rather than on science. This ratio can be a valid and reliable quantitative indicator for housing research, analysis, and administration of programs (a, b, and c above), depending on the research questions asked and methods used. However, to refer to it as a valid and reliable measure in all cases is inappropriate. Hulchanski argues that the 30% rule is an invalid and misleading measurement of housing need or ability to pay for housing (d, e, and f above).

Recognizing the weakness of affordability measures, HUD's Office of Policy Development and Research has developed and refined various methods to capture rental housing affordability need. One measure is called “worst case housing needs” and includes very low-income renters who (a) earn less than 50% of Area Median Income (AMI), (b) do not receive assistance, and (c) pay more than 50% of their income on housing, live in severely inadequate housing, or both. Harvard University's State of the Nation's Housing 2011 revealed that 19.4 million households (17.1%) paid more than half their incomes for housing, split between 9.3 million owners (12.4%) and 10.1 million renters (26.1%).

Meanwhile, housing cost burdens are moving up the income scale as well. According to Harvard's State of the Nation's Housing 2011, among households with real incomes under $15,000, 66.4% spent more than half their incomes on housing in 2009—an increase of 4.8% from 2001. Among households with incomes between $30,000 and $45,000, about 11.5% are severely cost burdened. Moreover, the share of households with incomes between $45,000 and $60,000 paying more than half of their income for housing nearly doubled to 6.4%.

As a standard-of-living measure, affordable housing is important for people's well-being, especially for lower income households. High housing costs relative to income are associated with severe financial burden that can leave households with insufficient income to meet other basic needs: food, clothing, transport, medical care, education, and so on. The general standard of a 30% expenditure-to-income ratio sheds light on how much income is available to cover nonshelter needs. The State of the Nation's Housing 2011 reports that after devoting more than half their monthly outlays to rent, families with children in the bottom expenditure quartile on average had only $593 left to cover other expenses. The dwindling supply of low-income housing also has an effect on affordability. For instance, the Joint Center for Housing Studies of Harvard University found that in 2009 there were 10 million extremely low-income renters’ households (those earning less than 30% of area median income) and just 6.2 million units that were affordable to those households if they were paying no more than 30 percent of their income for housing. Adding the dimension of availability, just 36 affordable and available units existed per 100 extremely low-income renters. This gap narrows somewhat for very low-income renters at 68 affordable and available units per 100 very low-income renters.

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