Most Renter Households Lack Enough Income to Cover All Living Expenses

As rents continue to rise, many American households are becoming increasingly burdened by rental costs, meaning they spend a large enough portion of their income on rent to put them in an economically precarious position. To measure rental cost burden, researchers and policymakers traditionally rely on the ratio approach, which divides a household’s monthly rent and utilities by their monthly income. Under this approach, households are considered cost burdened if they spend 30 percent or more of their monthly income on housing expenses. But experts have long raised concerns that this measure fails to accurately capture housing affordability.

This study compares the traditional ratio approach with a residual income approach for calculating housing affordability. The residual income approach incorporates household spending, including on nonhousing expenses, to estimate what households can afford. The authors use 2018 American Community Survey (ACS) data and the Economic Policy Institute’s (EPI’s) Family Budget Calculator, which provides estimates of expenditures on housing, food, child care, transportation, health care, taxes, and other necessities at the county level. They map the EPI county-level estimates onto actual households from the ACS to create a sample of 30.9 million renter households. To align with the EPI Family Budget Calculator estimates, the sample is limited to households with one or two working-age adults with four or fewer children and excludes households with members 65 and older.

To calculate cost burdens under the residual income approach, the authors first subtract spending on housing from the household’s reported income, creating a leftover income amount. If that amount is insufficient to cover combined nonhousing expenses, the authors classify the household as having residual income housing cost burdens. They then perform a series of regressions to determine how household characteristics, market conditions, and potential policy interventions contribute to the likelihood and degree of residual income cost burdens.

Key findings

• Under the residual income measure, 19.2 million (62.1 percent) households are cost burdened, compared with 14.8 million (47.9) under the standard ratio measure.
• Most renters with low incomes and many with middle incomes have little or insufficient income left to cover their expenses after making housing payments.
• The average cost-burdened household under the residual income approach is short by nearly $25,000 per year.
• Having more children significantly increases a household’s odds of being cost burdened under the residual income approach and is associated with a larger income deficit.
• Households of color are more likely to be cost burdened compared with white households. The odds of being cost burdened under the residual income approach are 1.2 times higher for Black households and 1.1. times higher for Hispanic households.
• If all households who spent more than 30 percent of their income on housing instead paid exactly 30 percent, the number of renters in the sample with residual income cost burdens would drop by 521,000 households.
• If combined housing and transportation expenses didn’t exceed 45 percent of a household’s income, the number of renter households with residual income cost burdens would drop by 2.4 million.
• Subsidies for health care, food, and child care expenses would all also reduce the number of cost-burdened households, though none by as much as limiting total housing and transportation expenses.

Policy implications

• Policies that reduce housing and transportation costs would most effectively reduce residual income cost burdens.
• The authors recommend several specific policies that could alleviate residual income cost burdens, including expanding existing housing subsidies like the Housing Choice Voucher Program, investing in more robust public transportation systems, connecting affordable housing to transportation networks, making neighborhoods walkable and bikeable, and designating carpool networks and incentives.
• In addition to reductions in housing and transportation costs, many households would benefit from other subsidies and programs that reduce household expenses, such as universal child care and affordable health care.
• Increasing income supports can help households with the lowest incomes to cover their monthly expenses. Policy examples include expanding the earned income tax credit, raising the minimum wage, or providing a universal basic income.