The Big Idea: A new way to measure housing

affordabilityRoger Valdez

Housing affordability versus affordable housing

“In Britain and the United States, affordability is often expressed in terms of ‘affordable housing.’ But affordability is not a characteristic of housing—it is a relationship between housing and people.”

Michael E. Stone, What Is Housing Affordability? The Case for the Residual Income Approach, University of Massachusetts–Boston

How do we measure housing affordability today?

The Housing Cost Income Ratio (HCIR)

HCIR is used as both an indicator and a normative standard.

Housing is affordable if a person pays 30 percent or less of their monthly income for housing.

The Simpson’s housing affordability according to HCIR

Homer earns:

$60,000 in annual income$ 5,000 in monthly income

Homer spends per month:

$1500 on housing (30 percent of his income)$2000 on donuts $2000 on beer $1000 on other food

Homer spends $6500 a month but he only earns $5000 a month.

He is $1500 behind each month

But based on the HCIR approach is housing is affordable.

He’s doing just fine.

The Residual Income Approach

“A household has a housing affordability problem if it cannot meet its non-housing needs at some basic level of adequacy after paying for housing.”

Michael E. Stone, What Is Housing Affordability? The Case for the Residual Income Approach, University of Massachusetts–Boston

The Simpson’s housing affordability using the residual income approach Homer earns:

$60,000 in annual income$ 5,000 in monthly income

Homer spends per month:

$1500 on housing (30 percent of his income)$2000 on donuts $2000 on beer $1000 on other food

Homer spends $6500 a month but he only earns $5000 a month.

He is $1500 behind each month

Homer doesn’t have enough money left over after paying his housing costs to pay for other important, essential things.

He needs housing assistance. Or maybe he needs help buying donuts.

Affordability: A real and serious problem Family of three earns:

$42,000 in annual income$ 3,500 in monthly income

Family spends per month1:

Housing 963Child Care 884Food 668Transportation 144Health Care 395Miscellaneous 305Taxes 510

This family spends $3869 a month but only earns $3500 a month.

They are $369 behind each month, even though their housing costs are less than 30 percent of their monthly income(28 percent).

Do they need assistance with housing or childcare? 1 Figures from Diana Pierce, The Self-Sufficiency Standard for

King County (City of Seattle), WA 2009

The Residual Income ApproachRemoves the assumption of a market failure (the idea that the market isn’t producing affordability)

More comprehensively accounts for poverty and allows for better interventions (higher wages, better health care, better child care)

Accounts for transportation and other costs that go down when living in a compact neighborhood

Removes pressure on housing market to produce a product that many people may not want to buy or rent (people live where they live for the schools, proximity to work and the neighborhood not an income ratio)

This approach would allow a focus on better multifamily housing (like courtyard housing) that is energy efficient and family friendly, even if it is slightly more expensive than other products.

Location Efficiency

Center for Neighborhood Technology has a page that compares housing costs in the region based on median income (about $50,000), transportation, and housing costs.

Location Efficiency

Annual Income: $45,000Household Size: 1Interest Rate %: 6.778

Good credit and enough funds for a 3% down payment and a buyer might qualify for an additional $40,575 on a mortgage in this neighborhood.

This is How Much More House you can Afford!

From www.locationefficiency. com

Should we redefine affordability?

Thank you for

listening!