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Economy, Housing Project

The Essentials Of Housing Economics: What Is The Measure That Matters?

“When did the housing crisis start?” and “When will we know it is over?” There is no quantitative answer to the first question and therefore no answer to the second. Tenant activists cite eviction data. But that data is diffuse and inaccurate, measuring the small number of tenancies gone wrong rather than housing need. Another unrealistic measure, used by the National Low Income Housing Institute is a ratio of high cost housing to low wages, a measure intended to generate alarm and more subsidies, not solutions. We need a real measure of the problem, and there are examples illustrate the challenge, but in the end, the best measure is price.

The official measure of housing affordability in the United States remains the normative standard that no household should pay more than 30 percent of its gross monthly household income on housing. But what happens when a family is paying 25 percent of its income toward housing but still can’t always come up with rent because of other costs? Does this mean a household paying less for housing is taking someone else’s unit something called “down renting,” and should be paying more somewhere else?

The Housing Cost Income Ratio (HCIR) is a strange and arbitrary measure rooted in the notion that housing should cost no more than a week’s wages, or about 25 percent of gross household income. How was that number set? It has its roots in 19thEuropean social safety net programs and was boosted 40 years ago to 30 percent without much study. Before I suggest an alternative, let’s look at some other efforts to challenge other key economic measures like recession and poverty.

An example I frequently use as an accepted measure of an economic problem is the measure of recession, generally defined as two quarters of negative growth in Gross Domestic Product (GDP). Not everyone likes this definition, especially many antipoverty advocates on the left. At the official end of the last recession in 2009, the Center for Social Inclusion (CSI) created an “impact index” as an alternative measure because,

GDP does not tell us about the difficulty of finding a job, who has health insurance, where the subprime crisis tore neighborhoods apart, or who was best-positioned to weather an economic storm.”

The impact index included measures for housing (affordability, foreclosures, vacancies, subprime lending and building permits), health, measured in terms of insurance coverage, jobs (wages, employment, income sustainability), and a measure they call, civics, a measure including poverty, gross domestic product, and state fiscal health.

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I’m not sure I agree with this measure, but what allows for them to diverge from the standard indicator is that a quantitative measure – two quarters of negative GDP – exists in the first place. The CSI measure using other existing measures to give more dimension to the sense that just because GDP figures are up, suffering doesn’t end; it’s more than just anecdotes or finger-on-the-scale reports offered by the National Low Income Housing Institute or the Eviction Lab.

Another example of a measure being refined is the federal government’s official poverty measure developed in the 1960s, a measure of the income needed to buy a “market basket” of consumer products. Most agree the old poverty measure is woefully outdated. Benefits that are supposed to be based on being below the poverty line end up sliding further up the scale (200 percent of the poverty level, for example) to account for the sense that being above the poverty line doesn’t mean a family isn’t poor. The government developed a Supplemental Poverty Measure (SPM) that includes variables for family size, composition, geography, and housing costs. Again, we can argue about whether the SPM is better because there was a measure of what poverty means in the first place.

In the United Kingdom, the Joseph Rowntree Foundation (JRF) has created something called the Minimum Income Standard (MIS). The JRF explains that the “MIS itself is not a measure of poverty, but is what the public has told us is sufficient income to afford a minimum acceptable standard of living.” The point is why try to measure poverty when the problem is income? Prices change based on supply and demand and so do wages; the question is what do people need to sustain what JRF calls an “acceptable minimum standard of living,” something with both quantitative and qualitative elements.

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Finally, let’s return to an idea for an alternative to the Housing Cost Income Ratio (HCIR) measure of housing affordability, the Residual Income Model (RIM), a measure based on how much money a family has left over after they pay housing costs. As I pointed out, the HCIR creates more troublesome questions that it resolves while RIM hinges on other costs: If a household pays half its income on housing but can adequately cover other costs there isn’t a problem. Think of a recent college graduate with a monthly income of $1600 living in a small apartment that rents for $800; if she can still cover her other costs and have $50 left over is she in need of a subsidy? Probably not, but the HCIR would dictate she would qualify.

On the other hand a household with two incomes earning twice that amount, $3200 with the same housing costs, $800 or 25 percent of its income would, under HCIR, be doing just fine. The system tries to cure this problem by imposing a cap of 60 percent of Area Medium Income (AMI) so that the larger household with lower relative income could still be eligible for benefits. But the HCIR system doesn’t account for costs other than housing and it calculates eligibility on gross income, income before taxes and other amounts are withheld from paychecks.

All of this together indicates that measures of economic disutility we currently have and even efforts to revise them are inexact at best; declaring a recession over when people still can’t find a job, finding a family just over the poverty line but still struggling for survival, and calculating housing need based on ratios of income to price. How then do we find a way to talk about housing as it relates to growth and the prevailing sense that there is a crisis?

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The answer is looking at household income. Looking at residual income and minimum income is a start. I’ve argued in favor here of what Milton Friedman called a negative income tax, a form of guaranteed basic income. But we need a ratio revolution. Affordability is a qualitative measure, not a quantitative one. That is, some people feel a thing is too expensive and others see the utility value of that same thing as worth the price. The Rowntree Foundation is on to something with its measure of a broadly and democratically defined acceptable standard of living, and this could be a guide for a basic income scheme. But the focus should be on income, not a normative ratio of average ranges of income to average price of housing.

If we want to solve housing price problems we shouldn’t use measures that are so inadequate and just measure pain retrospetively; there will always be misdistribution in every economic system and we usually only understand that after it has happened. Instead we should concentrate on an abundance of housing to begin with and income options that would ensure enough supply that when a family is unhappy they have flexibility to make a change. We shouldn’t be trying to measure pain, but trying to avoid as much pain as possible.

Source: forbes

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