Residual Income

The Big Idea: A new way to
measure housing affordability
Roger 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:
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:
Family spends per month1:
Housing 963
Child Care 884
Food 668
Transportation 144
Health Care 395
Miscellaneous 305
Taxes 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 Approach
Removes 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: $45,000
Household Size: 1
Interest 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?

Residual Income

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