What it means for a household to be cost-burdened

This article was first published on January 31, 2017. It’s still a relevant topic in our region, so we are sharing it again.

When housing advocates talk about the affordability crisis, they often focus on one important statistic: the share of cost-burdened households in a city.

A household is said to be cost-burdened when it pays more than 30 percent of its income toward housing expenses. As a more extreme measure, a household is said to be severely cost-burdened when it pay at least 50 percent of its income toward housing expenses.

This measure of housing cost burdens aims to identify households— typically defined as all the people who occupy the same housing unit— that spend a disproportionate share of their income on housing. Housing expenses are often the first thing households pay each month, but when they spend too much income on housing, they may not have enough left to spend on other necessary items.

But measuring cost-burdened households is a problematic way to assess the housing affordability crisis. There is a growing number of cost-burdened households in the United States, and this measure of housing affordability has real limits on its usefulness.

The 30 percent threshold is an artifact of American housing policy.

When public housing was initially built in the 1930s and the 1940s, households were eligible to live in public housing if they earned below a certain income. Rents were set by local public housing authorities.

By the 1960s, the costs of maintaining public housing had climbed. Local public housing authorities began to raise rents to meet capital needs, including the cost of maintaining and repairing aging buildings. However, these rental increases made it difficult for many low-income families to afford rents in public housing.

In 1969, the Brooke Amendment, which amended the original National Housing Act, mandated that families living in public housing would pay no more than 25 percent of their income on rent. (As an interesting historical aside, Edward Brooke (D R-MA) was the first African-American elected to the Senate since the Civil War.) The amendment was meant to ease the burden paid by low-income public housing residents.

By the 1980s, the rent threshold had been raised to 30 percent. Today, this is the standard rent threshold for assisted housing programs. Most households living in assisted housing pay no more than 30 percent of their income on rent.

Importantly, there is no social scientific justification for this 30 percent threshold. Conceptually, the measure aims to identify households that lack the resources to pay their living expenses after covering their monthly rent, but the 30 percent threshold is simply an historic artifact.

The percentage of households paying more than 30 percent of their income toward housing expenses in the United States is growing.

In 2014, nearly 40 million households – about one-third of all American households – were cost-burdened, according to the 2016 State of the Nation’s Housing report from the Joint Center for Housing Studies at Harvard University.

Notably, the share of cost-burdened renters has climbed while the share of cost-burdened homeowners has fallen. (We often use the terms cost-burdened and rent-burdened interchangeably when talking about rental households.)

In 2001, about 15 million renter households experienced housing cost burdens. By 2014, the number had risen to more than 21 million renter households.

During the same period, the share of those renters paying more than half of their income toward rent – those termed severely cost-burdened – climbed, as well. By 2014, 11.4 million renters were severely cost-burdened.

These cost-burdened households are concentrated among low-income renters. Nearly six out of seven households earning below $15,000 paid at least 30 percent of their income on rent. About 70 percent of them paid at least 50 percent of their income on rent.

Additionally, these households are concentrated in large cities, where the increase in rents often exceeds the growth in income.

In DC, nearly two-thirds of extremely low-income households — those with an income below 30 percent of the area median income — are severely cost-burdened, according to a recent analysis by the DC FIscal Policy Institute. About 25 percent of all renters in the District spend at least half of their income on housing costs.

The cost-burdened threshold is most useful for understanding the experiences of low-income, renter households.

Although both renters and homeowners can be cost-burdened, the impact may be very different.

Since homeowners build equity with their monthly housing payments, the burden of excessive costs may be less worrisome for them. Their excessive payments are often viewed as a form of investment or savings.

However, since renters are not building equity, they are getting no returns for their excessive payments. As a result, housing advocates are primarily concerned about renters paying a disproportionate share of their income for housing expenses.

Additionally, both low-income households and high-income households are considered cost-burdened if they pay above the 30 percent threshold. However, even after paying their housing expenses, high-income households will still have sufficient money available to take care of their basic living expenses.

Imagine a household earning $20,000. If it pays 30 percent of its income on rent, it is likely to be left without adequate resources to cover other living expenses, including food and medical expenses. In this scenario, housing cost burdens are consequential.

However, a household earning $100,000 that pays 30 percent of its income on rent will likely not face the same burdens.

Therefore, the measure is most appropriate for understanding the experiences of low-income households.

While this measure is easy to calculate and intuitive to explain, it is an imperfect tool for quantifying the affordability crisis.

Bottom line, the idea of paying 30 percent of income toward housing expenses is arbitrary. Although widely used by housing advocates as the standard measure of excessive costs, it may not reflect whether excessive housing expenses actually cause other burdens to household finances.

Critically, the 30 percent (and 50 percent) threshold(s) do not vary across income. This is problematic because the challenges of excessive rental costs may not be especially burdensome for high-income households.

They also do not vary by household size. Families with children likely have more after-housing expenses than single-person households, who can afford to spend more of their income on rent.

The primary alternative to measuring housing cost burdens is to measure post-housing income. Since rent is often the first – and most important – cost paid by households each month, this measure would ask whether households have a sufficient amount of money left over after paying their rent to meet their basic needs every month.

This measure of post-housing income would be more complicated to calculate because the amount of money needed to meet basic needs differs across cities and by type of households. However, it would provide a more accurate measure of whether excessive rental costs are limiting the ability of households to survive.