Board of Governors of the Federal Reserve System

December 22, 2017

Assessing the Severity of Rent Burden on Low-Income Families

Housing costs are a severe financial burden to many low-income families. The typical renter in the bottom quintile of the income distribution spends more than half of monthly income on rent and has less than $500 dollars left after paying rent. Moreover, the percent of income that this group spends on rent has risen about 10 percentage points since 2000. How much income it takes to cover rent or mortgage payments can affect the economic well-being and financial stability of families.² When households devote a large share of income to rent, an unexpected shortfall in income may leave them unable to pay rent and could lead to eviction. Moreover, households that have little income left after paying rent may not be able to afford other necessities, such as food, clothes, health care, and transportation. The large share of income required for housing also limits the ability to save and accumulate wealth.

To assess the rent burden on families, we analyze housing expenditures of renters using the American Community Survey (ACS) Public Use Microdata Sample (PUMS). Consistent with the U.S. Department of Housing and Urban Development (HUD), we define "rent burdened" as spending more than 30 percent of income on housing and "severely rent burdened" as more than 50 percent. We also compare the amount of income left after housing costs (or "residual income") to the Supplemental Poverty Measure.³ Recognizing that most renters in the upper 80 percent of the income distribution are not rent burdened, we primarily focus on those renters in the bottom quintile. The typical low-income renter faces severe rent burden, and this burden is largely similar across geographies. Additionally, low-income renters with children under age 18 face particularly high rent burdens and low "residual incomes," while older renters have somewhat lower rent burdens.

Rent burdens and residual incomes, by income quintile

The median renter in the lowest income quintile pays 56 percent of monthly income on rent, exceeding HUD's standard for "severe rent burden" (Figure 1). Severe rent burdens are generally not present among renters with income above the lowest quintile. In the second quintile of income, the median rent-to-income ratio is 28 percent, slightly below HUD's "rent burden" standard. The median renter household in each of the higher income quintiles spends less than 20 percent of their income on rent. Even though the typical higher-income renter is not rent burdened, some higher-income renters do pay large shares of income on housing.

Figure 1: Lowest-income families face severe rent burdens

Percent of income on spent on rent

To determine the sufficiency of income left after paying rent, we use the non-housing portion of the Supplemental Poverty Measure (SPM) thresholds.⁴ In 2015, the SPM estimated that a family of four on the border of poverty would have needed just under $1400 per month to cover non-housing expenses. The median monthly income after rent for the lowest-income renters is only one third of this amount. The median renter in the second income quintile has income left after rent that is 140 percent of the non-housing poverty threshold.

Lower rent-to-income ratios and higher "residual incomes" among higher income households imply that rental payments do not rise proportionally with income. The lowest income renters pay about half the median rent of the highest income renters (but earn only 10 percent of their income).

Table 1: Low-income renters have little income remaining after rent

Among low-income renters, nearly three-quarters have a residual income that is under the supplemental poverty threshold and 48 percent have a residual income that is less than half of this threshold.⁵ Fewer than 10 percent of renters in the second quintile have a residual income that falls short of the Supplemental Poverty Measure's threshold. Less than one percent of renters above the 2^nd quintile have this income shortfall.

Although renters in the bottom quintile appear particularly rent burdened, tax credits, rental assistance, and other in-kind benefits mitigate some of the burden. This assistance is typically not captured in our data. For example, in 2015 a low-income couple with two children whose wage income is at the median of the bottom quintile would qualify for an earned income tax credit of nearly $5,000 annually and may also be eligible for Supplemental Nutrition Assistance Program (SNAP) benefits of up to $4,000 per year. These benefits are available to a lesser degree to households in the 2^nd income quintile and are phased out for most households in the 3^rd quintile or above.

Changes in rent burdens over time
The share of income spent on rent has increased substantially for low-income households since 2000. In 2015 the median renter in the bottom quintile of the income distribution spent 11 percentage points more of their income on rent than in 2000 (Figure 2). This increase in rent burdens over the past 15 years occurred through each business cycle period including both the period prior to the financial crisis (2000-2006), the economic downturn (2006-2009) and the subsequent recovery (2009-2015). Although rent-to-income ratios are greatest among low-income households, the share of income spent on rent also rose among higher income renters (not shown).

Figure 2: Rent burdens for low-income families have risen over time

Percent of income on spent on rent

Figure 3 demonstrates the trend in residual income (after covering rental expenses) for renters in the bottom income quintile over this period. Consistent with the rising rent burden over time in Figure 2, inflation-adjusted residual incomes have also fallen among low-income renters. Over this period, rents rose for the low-income population while their median incomes fell by just over $100. Both trends contribute to greater levels of economic hardship, and jointly result in the decline in residual incomes for low-income renters. Of the overall decline in residual income since 2000, around two-thirds came from declines in income among renters and one third resulted from rising rents.

Figure 3: Incomes have dropped and rents have risen for low-income families, decreasing "residual incomes"

Monthly amount ($)

Geographic variation in rent burdens and residual incomes

The challenge of rent burdens extends to micropolitan and rural areas as well as larger cities. Rent-to-income ratios for low-income renters are highest within metropolitan areas and lowest in rural areas, but all are above HUD's rent burden threshold (Table 2).⁶ Similarly, when considering income left after housing expenses, the lowest quintile of renters in all geographic areas similarly fall well below the residual income expected to remain out of poverty.

High rent burdens also represent a challenge for the lowest-income households irrespective of where they live in the country. Rent-to-income ratios are highest in the Northeast and West, although the typical low-income renter in all four regions are near, or above, the HUD standard for being severely rent burdened.⁷

Table 2: Low-income renters face high cost burdens in all geographies

Rent burdens by household structure

Two groups that often warrant additional attention in public policy discussions are families with children and the elderly. Low-income renters with children pay a median of three-fifths of their monthly income on rent, leaving under $450 in residual income (Table 3). Low-income older renters pay a lower share of their income on rent, and have higher residual incomes. Moreover, over 70 percent of low income households with children rent their homes. However, counterbalancing the somewhat higher rent-to-income ratios for low-income families with children, tax credits and non-cash benefits that are excluded from traditional cash pre-tax income measures are typically larger for families with children than for either elderly or non-elderly adults without children.

Table 3: Low-income families with children and renters of all races and ethnicities face heavy rent burdens

Low-income renters of all races and ethnicities face high rent-to-income ratios and low residual incomes. Rent burdens are somewhat higher for low-income Hispanic renters than for white renters, although the rent burden for whites is slightly above that seen among blacks.⁸ However, higher proportions of low-income Blacks, Asians and Hispanics are renters, compared to low-income white families.

Conclusion
In this note, we have shown that the lowest-income families face severe rent burdens. Rent burdens have increased over the past 15 years, due to both increasing rents and decreasing incomes. Prior research has shown that households who spent large shares of their income on rent or other housing expenditures have lower economic well-being.⁹ These rent burdens are a potential source of stress and financial instability to households, particularly for low-income families with children.