Is Residual Income a Better Metric for Housing Affordability?
A working paper from Harvard's Joint Center for Housing Studies examines housing affordability on the basis on residual income, a metric that's more sensitive to demographic differences in circumstance than the usual 30-percent standard. Chris Herbert and Daniel McCue write, "This alternative approach improves on the simple 30-percent standard by estimating the cost of 'everything else' as a function of the number and ages of all household members. It then estimates how much income would be available to pay for housing if those other costs were fully covered."
"In this framework," they go on, "the share of income that can be devoted to housing is not a single standard, but rather varies depending on both the size and composition of the household and the level of household income." That means a well-paid young professional may be devoting 50 percent of his or her income to rent, but still have more than enough for necessary and discretionary expenses, even in a high-cost city. The same would likely not be the case for someone earning low wages, or for a household with lots of kids.
The paper finds that compared to the residual income measure, the 30-percent standard often overstates affordability problems in high-cost markets, for high-income and smaller households. But overall levels of affordability remain similar in both models.
In a Slate article expanding on the topic, Henry Grabar writes that the 30-percent model "can't tell the difference between places where rents are growing too fast and those where incomes are growing too slowly—making it hard to tell if the problem is a housing shortage or the more entrenched issue of poverty and low wages."