The US Department of Housing and Urban Development (HUD) has this to say about the price of housing: “Families who pay more than 30 percent of their income for housing are considered cost burdened and may have difficulty affording necessities such as food, clothing, transportation and medical care… A family with one full-time worker earning the minimum wage cannot afford the local fair-market rent for a two-bedroom apartment anywhere in the United States.”
Affordable Housing means homes that an average family can pay for without sacrificing too much of its income. But what’s an average family? How much of a family’s income is too much? The National Association of Realtors quantifies these concepts with its Housing Affordability Index (HAI). Every month the HAI crunches some numbers to find the median income of an American family, as well as the median single-family home price and the median 30-year mortgage rate. The HAI then imagines this average family paying off a typical mortgage loan corresponding to 80% of the average home price.
The base HAI is 100. At this value, the average home is just barely affordable, with the average family contributing 25% of its income to home payments. (This is a somewhat smaller burden than the HUD baseline of 30%.) An HAI above 100 is better because it indicates a larger proportion of families can afford the same home. In April 2015, the median household income was $66,483, the median home price was $221,200, and the nationwide HAI was 164.9.
Regional data show the HAI varies considerably by location. An average home on the west coast costs nearly twice as much as an average home in the Midwest, despite nearly identical household incomes. The most affordable city in 2014: Youngstown, Ohio, with an HAI of 369. The least affordable: San Jose, California at 64.3. A family in San Jose needs to earn almost twice the city’s median income to afford a typical house.
But let’s get back to that $66K national average. At the national minimum wage of $7.25, it takes two adults each working 88 hours a week to earn that much. And for a family with only one wage-earner, there are literally not enough hours in the week to make $66K. (Yes, I’m ignoring overtime pay as well as the tendency for cities and states with higher cost-of-living to set higher minimum wages.) The point is that some folks are paying WAY more than 25% of their income for housing… and that lots of families get stuck in rentals because they simply can’t qualify for a mortgage loan.
If we want a better HAI then there are two ways to do it: increase the average family income, or decrease the average home price. Raising wages and creating more jobs without a corresponding inflation in consumer pricing is a thorny economic problem. Making comfortable housing less expensive is a comparatively straightforward design challenge, with a few hurdles in public perception. I would propose that building less expensive, more efficient housing stock is the best way to achieve more affordable housing. With microhousing taking off in many American cities, we’re on the right track.