September 25, 2018

Measuring Housing Affordability: Assessing the 30 Percent of Income Standard

Christopher Herbert, Alexander Hermann, Daniel McCue

The 30-percent of income standard is a widely used and accepted measure of the extent of housing affordability problems across the country. While simple and easy to implement, the measure is not perfect. The limitations of the 30-percent standard have long been recognized: its rigid uniformity amidst a diverse and ever-changing array of affordability challenges raises questions about its validity over time and across markets and household types. This paper examines whether an alternative measure, based on the concept of residual income, produces a different assessment of the extent and incidence of housing affordability challenges. In the end, this paper finds that, compared to the residual income measure, the 30-percent standard tends to overstate housing affordability challenges for high-cost markets and for higher-income and smaller households but yields similar results regarding overall levels of affordability. Thus, given the simplicity of the 30-percent standard, it remains a reliable indicator of affordability both over time and across markets. Caution, however, should be used in using this measure assess affordability challenges among different income levels or household types as variations in the cost of other necessities would suggest the need for corresponding variations in the payment standard used.

Category: Working Papers

Read More About: Affordability