Written by
Nicholas Bradley Allen, P.hD. student, Department of Urban Studies and Planning, MIT
on
03/06/2020
Although there were no methodological changes to the Living Wage calculator in 2020, many counties and metropolitan areas saw significant changes in living wage levels. The largest component of these changes is housing cost, which reflects a revision in HUD’s forecasting method for current Fair Market Rents (FMRs).
FMRs continue to be estimated as the 40th percentile of gross rent paid by recent movers, defined as the shelter rent and utility cost for renters who have moved in the last two years. Movers’ gross rents are reported in the most recent release of 5-year American Community Survey (ACS) data. Because ACS data releases lag the market by about two years, unadjusted FMRs do not reflect recent rental market changes. A forecasting model for forward price adjustment is required to accurately estimate current rent levels.
Until September 2019, HUD made forward adjustments to FMRs using a national index of housing costs, known as the Gross Rent Index. A limitation of national price indices is that they cannot account for asynchronous trends in the local market: a large increase in local area shelter rents or a large reduction in utility prices would not be picked up by national trend data. By request of the U.S. Senate, and after extensive testing, HUD replaced this national index with a locally-adjusted rent index for 2020. The new model uses both national and local price inputs, with the parameters tuned for each local area to minimize differences between actual gross rents and modeled FMRs. More information about this update can be found in HUD’s notice of changes in the Federal Register.
The Living Wage Calculator aims to provide an accurate estimate of the true costs of living in U.S. local areas. Under HUD’s new forecasting approach, its living wage estimates should be more sensitive to recent local changes in housing costs.
