Housing trade-offs: Affordability not the only stressor for the middle class

For Sale signs stand in front of houses in a neighborhood where many British people have purchased homes in Davenport, Florida, U.S., June 29, 2016.  Photo taken June 29, 2016. REUTERS/Phelan Ebenhack - TM3EC6U0SV201

Housing costs have risen faster than incomes over the past five years. While low-income families have long struggled to pay the rent, middle-income families are increasingly facing affordability challenges in urban areas with strong labor markets. In a new report, I examine middle-class housing stress along four dimensions: affordability, inadequate space, commute times, and homeownership. 

Housing can create direct financial stress if rent or mortgage payments take up too much of a household’s resources. Because housing is the largest single expenditure in most family budgets, high housing costs may crowd out other necessities, such as food, transportation, and health care. Households may adjust to high costs by downsizing to smaller units or “doubling-up” with other people. Crowding – defined as more than two persons per bedroom – can harm children’s academic achievement, physical and mental health. 

Households can reduce their housing expenses by moving farther away from city centers. Long commutes are unpleasant both for individuals and for society because of the environmental impacts. The final metric of housing stress is homeownership. During periods of rising housing values, homeownership provides insurance against housing expenses rising faster than incomesMoreover, U.S. tax policy heavily favors wealth building through homeownership 

I examine whether housing stress among middle-income households varies by income, household type, race, and geography. Understanding how households adjust to financial constraints will allow policymakers better tailor policy responses to relieve housing stress. 

Lower-middle income households are stretching to afford housing.  

Middle-income households collectively do not have an affordability problem, measured against HUD’s “cost burden” benchmark. Combining all households in the three middle income quintiles, renter households spend just under 30 percent of their income on housing costs. Middle-income homeowners spend 25 percent.  

Breaking out middle-income households into three separate quintiles tells a different story (Figure 1). Lower-middle income households – those in the second quintile – spend nearly 40 percent of income on housing. Upper-middle-income households (fourth quintile) spend less than 20 percent. Within each income quintile, households living in expensive metro areas devote a larger the share of their income to housing than their counterparts in cheaper locations (figures are available in the full report). Additionally, non-white households spend more on housing than white households in the same income quintile. 

Figure 1Middle-income households occupy plenty of space – except for families with kids. 

The typical middle-income household lives in a home with one person for every bedroom – half the threshold for crowding defined by HUD. But the incidence of crowding is considerably higher for families with children than for childless households (Figure 2). Families living in expensive housing markets are worse off still. Five percent of families with children in the cheapest metros are crowded, rising to about 14 percent of families in the most expensive metros. Conversely, more than half of households without children live in homes with excess space (less than one person per bedroom). Even in expensive metros, more than 40 percent of older, childless households have excess space. 

Figure 2Long commutes are more common in expensive housing markets  

One critique of HUD’s 30 percent affordability standard is that it does not take into account transportation costs. Very often, neighborhoods that offer less expensive housing are farther from job centers, so require households to absorb higher time and money costs of commuting. Comparing commuting times across geographic areas confirms that middle-income households in expensive housing markets are more likely to have longer commutes. The typical middle-income household spends just under 30 minutes one way commuting to work. Only four percent of households in the cheapest metros have hour-long commutes, while more than 10 percent of households in expensive metros commute that long. 

Figure 3Among middle-income households, homeowners are wealthier, older, and whiter. 

Homeownership rates show some of the starkest variation across income quintiles. More than 70 percent of upper-middle-income households are homeowners, compared to 40 percent of lower-middle-income households. Childless households over 40 are the most likely to own their homes, with childless households under 40 the least likely. Black and Hispanic households are least likely to own their homes, with largest gaps among lower-middle-income households. Black households in the middle income quintile are slightly less likely to own their home than white households in the income quintile below. Homeownership rates for all income quintiles are lower in the most expensive metro areas, where down payments are much larger hurdles. 

Figure 4Better targeted policies could relieve housing stress for middle-income households. 

Most middle-income households are doing well in terms of housing affordability, adequate space, commute time, and access to homeownership. But housing stresses are more pronounced for certain types of households, and in certain geographies. This implies that, although some national policy responses may be appropriate, any federal policies should take into account regional and local variation.  

Policies that modestly increase incomes or reduce housing costs could help reduce financial stress on lower-middle income householdsFor lower-middle income households in inexpensive metropolitan areas, the median affordability gap (the difference between housing expenses and HUD’s 30 percent threshold) is about $100 per month. 

Persistent homeownership gaps by race, age, and geography suggest that policymakers should develop wealth-building programs that are not tied to homeownership. Programs that incorporate forced savings mechanisms and tax incentives but are independent of tenure could help both renters and owners accumulate savings. 

Because the worst stresses are experienced in expensive metros, it is also imperative that state and local governments address the persistent housing supply gap that has led to these high prices. Any long-term solution must involve increasing housing supply, especially near jobs and transit infrastructure. High cost cities and states have struggled with policy changes to expand housing supply, encountering political resistance from long-term homeowners who enjoy their large houses and have built substantial wealth over the past decades. Federal policies like wealth taxes could discourage space hoarding among long-time owners. 

Housing affordability, quality, and location matter for the quality of life of the American middle class. Policies to reduce housing stress are available, but will have to be carefully designed and implemented.  

Tiffany Ford provided outstanding research assistance