Rental Cost Burdens in Major US Cities

Housing affordability is, and probably always will be, a hot topic. There are a number of ways to measure affordability but one of the most popular is by measuring “rental burden”. This measure, estimated yearly by the US Census’s American Community Survey, looks at gross rent as a percentage of renting households’ income over the last 12 months.

With a rule of thumb that no more than 30% of your income should go to housing expenses, there are two categories of cost burden:

  • Moderately-cost burdened households spend between 30% and 49.9% of their income on rent.
  • Severely-cost burdened households spend over 50% of their income on rent.

I decided to look at rent burdens in 2015 (the latest year with data) across the 10 most populous US cities, plus my hometown of Washington, DC and famously expensive San Francisco.

What does rent burden look like in these cities?

  • Of the cities reviewed, the city with the lowest proportion of rental cost burdened households was San Francisco (37%)!!! This number surely comes as a surprise to many however, if we consider a few characteristics of SF, this makes more sense. Chiefly, many lower income residents (more likely to be cost burdened) were priced out a while ago, SF has a high number of rent controlled properties, and although SF is famously expensive to rent in it also has a very high average income.
  • The next lowest cost burdens were in Washington, DC (44%) and in San Antonio, TX and Dallas, TX (each with 45%). In DC, despite high living costs, average incomes are also high. Conversely, in the Texan cities, average incomes are significantly lower but so are housing costs.
  • Over half of renting households in New York, San Jose, Philadelphia, San Diego, and Los Angeles are at least moderately burdened. A whopping 58% of renting households in Los Angeles pay at least 30% of their income in rent.

2015 rent burden by city

How has rent burden changed since 2005?

  • Cities hit harder by the financial crisis of ’07-’08 tended to see corresponding increases in their rental cost burdens. In Phoenix and Los Angeles, for instance, the proportion of households at least moderately rental cost burdened increased from 2005 to 2010 by 12% and 6% respectively. On the other hand, fast growing Texan cities, which weathered the financial crisis pretty well saw cost burden decreases or stagnation over that period: -4% for Houston, -3% for Dallas, and 0% for San Antonio.
  • From 2005 to 2015, a majority of cities surveyed have seen a decline in the proportion of renters that are severely cost burdened: declines of 9% in Dallas and Chicago and 11% in San Antonio and San Francisco. However, San Antonio has actually seen an increase, by 8%, in the proportion of moderately cost burdened renters over the same period.
  • San Francisco saw a decline of 24% in the number of rent-burdened households from 2005-2015. Although surprising on the surface, as discussed above, it makes more sense when you consider the dynamics and characteristics of the SF market.
  • From 2005 to 2015, New York, San Jose, and Los Angeles all saw increases in the proportions of both moderately and severely cost burdened renters – with Los Angeles leading the way with an 11% proportional increase of renters that are at least moderately cost burdened (see above).

 

Change in rent burden by city

Caveats

It goes without saying that this is an incomplete picture. The vast majority of the country (92%) lives outside of these cities and even within them, there are many variables and factors at play that impact whether a place is “affordable” or not. For instance, some wealthy families may choose to spend over 50% of their income on rent but not be “burdened” and, alternatively, poor families may spend only 25% of their income on rent but still find total living expenses untenable or living conditions unbearable. However, rental cost burden is an easy way to get one snapshot of rental affordability for most people.

Tax Increment Financing: A Quick Primer

Cities seeking to spur development in underinvested areas have a number of tools at their disposal to entice developers. These tools include zoning changes, density bonuses, improved infrastructure, tax-related incentives, and more. All carry their own benefits, risks, and drawbacks, but within the broad tax category is a particularly interesting approach called tax increment financing (TIF).

How does it operate?

TIF has been succinctly defined as “a targeted development finance tool that captures the future value of an improved property to pay for the current costs of those improvements.” It does this by:

  1. Creating a TIF district – a TIF district (or authority) is created composed of the property/properties to be developed as well as surrounding lots
  2. Freezing assessed value within the TIF district – the assessed taxable value of property within the district is locked or frozen at pre-development level. This base tax level will continue to flow to the local or state tax authority for the remainder of the district’s life (e.g. 20 years).
  3. TIFDiverting additional value to the TIF – any additional taxable value that the district enjoys during the term of the TIF district is diverted to that authority.
  4. Paying for improvement through the TIF – that new revenue is used to fund improvements within the district, including those the district (or another authority) may have paid for at the start (outright or through a bond) to catalyze the growth.
  5. Benefiting the state/city budget after TIF term ends – After the TIF district concludes, the full taxable value of the property within the district can be taxed by the traditional state/local body.

What can TIF money be used for?

TIF funds are used to finance activities or pay off debt for costs related to “public infrastructure, land acquisition, demolition, utilities, planning, and more. TIF funds have also been used to help support community amenities such as parks, recreational facilities, schools, and network infrastructure.” (source)

How do TIFs help government pay for results?

A government could encourage private infrastructure improvements by promising to reimburse all or some of those costs through increases in property taxes captured by the TIF. While it’s hard to prove that any occurring growth is indisputably caused by those improvements (see counterfactual criticism, below), this provides a potentially more attractive model than seeing no improvement or having government paying for the infrastructure outright, especially in risky projects where the benefit is uncertain. In this sense there is, at least theoretically, more accountability to results than some other tools at government’s disposal to encourage growth.

Does it work?

Almost every state authorizes use of TIF and, once allowed, it’s almost entirely up to local jurisdictions (cities and counties) whether to use it.

In Chicago alone, there are nearly 150 TIF districts. While TIF is a particularly well-used tool in Chicago, they are common in communities across the United States. The promise of TIFs – encouraging development in blighted areas through improvements that pay for themselves – is attractive and is undoubtedly behind their widespread adoption. However, is there evidence that they’re successful at encouraging economic growth?

This question is complicated by one of the biggest criticisms of TIF: that they are unnecessary and, further, benefit private interests to the detriment of the public treasury. This argument questions whether development in a TIF district would have occurred without the TIF with the result that money that should be flowing to city schools are instead being used to fund developer giveaways.

While it’s challenging to do a randomized controlled trial with blocks of land, we can compare districts with a TIF to similar districts without one and seek to measure key economic metrics like jobs, land value, economic growth, etc. The evidence thus far, while far from conclusive, isn’t kind to TIF:

  • One study from Iowa found no net economic benefits from TIF districts.
  • Another, from Illinois concluded that faster commercial growth in TIF districts may be offset by slower growth in nearby non-TIF districts – in other words, growth isn’t created, it’s just redistributed locally.
  • A 2003 ‘community perspective’ study from Chicago found that “Tax increment financing has not been proven to be effective at generating either jobs or new businesses [and] has an ambiguous effect on housing markets, determined partly by how TIF districts are designed, but usually harms low-income renters and homeowners.”
  • A detailed study of TIF usage in Northeastern Illinois found that for a third of TIF districts, property value growth was less than in non-TIF districts in the same municipality.

In addition, TIF has been criticized ideologically as a form of ‘crony capitalism’.  Additionally, there is concern that during the terms of the TIF, the model forces non-TIF areas to take a higher share of the local tax burden.

Unfortunately, there is still limited evidence of the effectiveness of TIF and most of the existing evidence is small scale and concentrated on a few high-usage jurisdictions (notably the Chicago area). Ultimately, TIF may be a tool best suited to a few cases but, like many public policy tools, indiscriminately overused by policymakers.