Cost burdened

What Is Cost Burdened?

"Cost burdened" is a term used in personal finance to describe households that spend a disproportionately large percentage of their household income on housing expenses. Specifically, the U.S. Department of Housing and Urban Development (HUD) defines a household as cost burdened if it pays more than 30% of its gross income for housing, including utilities. Households paying more than 50% are considered "severely cost burdened."¹² This financial state can significantly impact a household's financial stability, leaving less discretionary income for other necessities like food, healthcare, transportation, and savings.

History and Origin

The concept of a "cost burdened" household, particularly the 30% income threshold for housing costs, has roots tracing back to the late 19th century. Early studies and aphorisms suggested that a "week's wages for a month's rent" was a common, descriptive measure of housing expenditure, which roughly equated to 25% of income.¹¹

This benchmark gained formal traction in U.S. housing policy in the mid-29th century. The Brooke Amendment to the Housing and Urban Development Act of 1969 codified a 25% income-to-rent ratio as the payment standard for public housing.¹⁰ However, in the early 1980s, driven by budgetary considerations, this standard was increased to 30% for most federal housing programs.⁹ Since then, the 30% figure has become the widely accepted metric for defining housing affordability and identifying households that are cost burdened.⁸

Key Takeaways

A household is considered cost burdened if it spends over 30% of its gross income on housing.
"Severely cost burdened" refers to households spending over 50% of their income on housing.
The definition is a critical economic indicator used by government agencies and researchers.
Being cost burdened can limit a household's ability to cover other essential living expenses and save for the future.
The 30% threshold originated from U.S. housing policy adjustments in the late 20th century.

Formula and Calculation

The calculation to determine if a household is cost burdened is straightforward. It involves dividing the total monthly housing costs by the gross monthly household income and then multiplying by 100 to get a percentage.

\text{Housing Cost Burden} = \left( \frac{\text{Total Monthly Housing Costs}}{\text{Gross Monthly Household Income}} \right) \times 100

Where:

Total Monthly Housing Costs: Includes rent or mortgage payments, utilities (electricity, gas, water, trash), and often insurance and property taxes for homeowners.
Gross Monthly Household Income: The total income earned by all members of the household before taxes and other deductions.

For example, if a household has a gross monthly income of $5,000 and pays $1,600 per month for rent and utilities, their housing cost burden would be:

\left( \frac{\$1,600}{\$5,000} \right) \times 100 = 32\%

In this scenario, the household would be considered cost burdened because 32% exceeds the 30% threshold.

Interpreting the Cost Burdened Status

Interpreting a cost burdened status primarily involves understanding its implications for a household's overall financial health. When housing costs consume more than 30% of gross income, it signifies that less money is available for other essential expenditures. This can lead to difficult trade-offs, where families might cut back on food, healthcare, or transportation to keep a roof over their heads.⁷

A household that is cost burdened may struggle to build an emergency fund, pay down debt, or save for long-term goals like retirement or education. This can perpetuate a cycle of financial vulnerability, particularly when unexpected fixed expenses or variable expenses arise.

Hypothetical Example

Consider the Miller family, consisting of two adults and two children. Their combined gross monthly income is $4,500. Their monthly housing expenses include:

Rent: $1,200
Electricity: $150
Water: $75
Trash: $25
Internet: $60

Total Monthly Housing Costs = $1,200 + $150 + $75 + $25 + $60 = $1,510

To determine if the Miller family is cost burdened, we calculate the percentage of their income spent on housing:

\left( \frac{\$1,510}{\$4,500} \right) \times 100 \approx 33.56\%

Since 33.56% is greater than 30%, the Miller family is considered cost burdened. This means that after paying for housing, they have $4,500 - $1,510 = $2,990 remaining for all other living expenses, which can strain their budgeting efforts.

Practical Applications

The concept of being cost burdened is widely applied by policymakers, researchers, and housing advocates to assess and address affordability challenges in the housing market. Government agencies, such as the U.S. Department of Housing and Urban Development (HUD) and the U.S. Census Bureau, regularly track the number of cost-burdened households to understand the scope of housing challenges across different demographics and regions.⁶ For instance, in 2023, nearly half of all renter households in the U.S.—over 21 million—were considered cost burdened.

Th⁵is data informs public policy debates, the allocation of housing assistance programs, and urban planning initiatives aimed at improving the rental market and overall housing access. Financial counselors also use this metric to help individuals understand their financial situation and develop strategies to achieve greater financial stability.

Limitations and Criticisms

While widely used, the 30% rule for defining "cost burdened" households faces several limitations and criticisms. One significant critique is its "one-size-fits-all" nature, as it does not account for variations in cost of living across different geographic areas or for households of varying sizes and compositions. A h⁴ousehold in a low-poverty line area might be less burdened by spending 30% of its income on housing than a household with the same income but significantly higher non-housing expenses in a high-cost city.

Another criticism is that the 30% threshold may overestimate affordability problems for higher-income households who choose to spend more on housing for lifestyle reasons, while underestimating the severe burden on very low-income households who, even at 30%, are left with insufficient funds for other basic necessities. Som³e argue for alternative measures, such as a residual income approach, which focuses on the income left over after housing costs to cover essential non-housing expenses. Exp²erts from institutions like the Brookings Institution suggest that the rule is outdated and arbitrary, advocating for a more nuanced approach.

Cost Burdened vs. Housing Affordability

While often used interchangeably, "cost burdened" and "housing affordability" are distinct but related concepts. Cost burdened specifically refers to a household's financial state where housing expenses exceed a defined percentage of income, typically 30%. It is a direct measurement of a household's individual financial strain concerning housing.

Housing affordability, on the other hand, is a broader concept that describes the general ease with which people can afford housing in a given market or region. It considers factors beyond individual household income, such as median home prices, average rents, local wage levels, and overall market conditions. A housing market might be generally considered unaffordable if typical incomes cannot support typical housing costs, leading to a high prevalence of cost-burdened households within that market. Therefore, while a high number of cost-burdened households indicates a lack of housing affordability, "housing affordability" encompasses the systemic conditions, whereas "cost burdened" describes the individual outcome.

FAQs

What does "severely cost burdened" mean?

A household is considered "severely cost burdened" when it pays more than 50% of its gross monthly income toward housing expenses, including utilities. This indicates an extreme level of financial strain.

##¹# Is the 30% rule legally binding?
The 30% rule is primarily a guideline used by government agencies, financial institutions, and housing programs to assess housing affordability and eligibility for assistance. It is not a universal legal mandate for all households, but it influences lending standards and eligibility for public housing support.

What are common causes of becoming cost burdened?

Becoming cost burdened can result from a combination of factors, including stagnant wages, rising housing costs due to inflation and limited housing supply, job loss or reduction in income, and accumulating other debts that impact overall debt-to-income ratio.

Can homeowners be cost burdened?

Yes, homeowners can certainly be cost burdened. Their housing costs include mortgage principal and interest, property taxes, homeowner's insurance, and utilities. If these combined expenses exceed 30% of their gross household income, they are considered cost burdened, similar to renters.

How can a household reduce its cost burden?

Reducing a cost burden can involve increasing household income, finding more affordable housing, or cutting down on other fixed expenses and variable expenses to free up more income for housing. Strategies include seeking higher-paying employment, relocating to areas with lower cost of living, or exploring housing assistance programs if eligible.