Fannie Mae: Is Government’s Definition of ‘Affordability’ Accurate?

According to the U.S. Census Bureau, nearly a third of American households, owned or rented, experienced affordability problems in 2014. Fannie Mae, however, would like to challenge.

The U.S. Census Bureau's American Community Survey (ACS) found that more than 18 million homeowner households and more than 20 million renter households experienced housing affordability problems last year, with renters suffering more consistently high “cost burden” issues than owners.

A household is considered cost burdened if it spends more than 30 percent of its gross income on housing costs. According to the Census, there were about 115 million households in the United States between 2009 and 2014.

“These are big numbers that demand our attention,” said Nuno Mota, an economist at Fannie Mae. “However, considering that there are a number of affordability metrics currently used throughout the industry, are these numbers providing the most accurate view of the overall affordability picture, or are we only getting a partial view?”

To get better answers, Fannie has launched the Housing Affordability Primer, which contrasts five common housing affordability metrics used in the industry: Housing cost-to-income ratios; researcher N.K. Kutty's residual income approach; and the home purchase affordability indicators of the National Association of Realtors, the California Association of Realtors, and the National Association of Home Builders.

“No single measure can give us a complete view of the matter.”

Nuno Mota, Economist, Fannie Mae

The purpose of the primer is to give Fannie Mae insight into which indicators may offer the best insight for different facets of housing affordability. And that plural on “indicators” is emphasized repeatedly in the primer.

“No single measure can give us a complete view of the matter,” Mota said.

For example, the residual income approach deems that a household faces an affordability problem if the monthly income left over after covering all housing costs is less than the amount necessary to purchase a minimum level of non-housing-related items. But Kutty defines minimum non-housing consumption as two-thirds of the U.S. Census Bureau's poverty threshold.

“Although both metrics indicate consistently higher rates of affordability problems for renters than for homeowners, the residual income metric estimates markedly fewer affected households than the traditional cost burden measure, regardless of tenure status,” he said. “In 2014 the traditional cost burden measure indicated that some 9 million more renter households and 11 million more homeowner households faced affordability challenges than the residual income metric.”

While Fannie Mae has no answers so far, the agency feels better prepared to find them.

“A comprehensive understanding of housing affordability's multiple measures is essential for an informed discussion on the issue,” Mota said.