By Mariia V. Zimmerman

The housing market in America is changing dramatically as American households get older, smaller, and more ethnically diverse, and these shifting demographics are fundamentally re-scripting the American dream. While the single-family home with a two-car garage in the suburbs was ideal for the family with a breadwinner dad, stay-at-home mom and several kids, it doesn’t work nearly so well for families with two working parents and one child, or for “empty-nesters” or other households with no children.

Single adults will soon be the new majority in this country. Married couples with kids--a demographic group that made up the vast majority of households a century ago--now total just 25 percent, a number expected to drop to 20 percent by 2010. At the same time, the nation’s population is becoming increasingly diverse, with almost half the population expected to be non-white by 2050, and almost a third of that growth due to immigration.

These age groups and household types are flooding the housing market with buyers and renters who are interested in smaller homes and a lifestyle that’s more convenient--with entertainment, culture, sidewalk cafes, parks, and shopping all within walking distance. People want transportation options and more housing choices, including lofts, live-work spaces, townhomes, row houses, courtyard housing, and other housing types suitable for walkable, higher-density urban neighborhoods.

Fortunately, the U.S. is in the midst of a transit-building boom, with almost every metropolitan region planning or building some form of urban rail, busway or streetcar system. The competition for federal funding is so intense that the wait to get a proposed new project funded is almost 50 years. As a result, some regions aren’t waiting. Last fall voters in Denver, for example, approved a local sales-tax increase to fully build out their transit system in a dozen years, improving their bus system and adding six light rail lines, three commuter rail lines, and 70 stations.

The Affordability Index – Rethinking our Notions of “Affordable”

For most American households, wealth is perceived as the value of the family home. Few people are aware of how much they spend annually on car payments, insurance, gas, parking and car repairs, while the rent or mortgage is typically a simpler sum. But it turns out that a relatively inexpensive home with a three-car garage in a remote suburban subdivision is not the same “deal” as a similarly priced home in a more urban area when one factors in transportation costs. Many people moving to distant suburbs for cheap housing may not in the end save money or build as much wealth. For low-income families this is a particular paradox. Not only are housing prices beyond the reach of many lower-income families, but they also bear a higher burden in transportation costs as these expenditures claim a higher percentage of their household budgets even if they are spending less.

While housing is considered affordable if it accounts for 30 percent or less of a household’s monthly budget, there is no recognized benchmark for determining “affordable” transportation spending. Nationally, transportation is the second largest household expenditure after housing and ranges from less than 10 percent in transit-rich areas to almost a quarter of the average household’s expenditures in areas where there are few transportation options. The cost of driving in the U.S. last year was pegged at 50 cents per mile, and the annual cost of auto ownership averaged about $10,000.  And these costs will only increase with the rising price of gasoline.

Transportation costs, like housing costs, vary widely within metro areas, though, generally speaking, housing is cheaper the farther one lives from the Central Business District, while transportation becomes more expensive. A growing body of research has shown a strong relationship between increased density, transit access, and pedestrian friendliness on the one hand, and reduced vehicle miles traveled and automobile ownership on the other. According to the 2005 Joint Center for Housing Study, those living in housing considered to be affordable spend an average of $100 more on transportation per month than those living in areas with higher housing prices but located closer to the urban core. Given the increasing costs of driving, the savings that can result from living in a dense, transit-friendly community can be considerable.

Up until now, a household’s transportation demand was considered to be primarily driven by household income and size: Larger and wealthier households tend to own more vehicles and drive more miles. But research undertaken by Reconnecting America shows that the land use and transportation characteristics of a neighborhood--density, walkability, the availability and quality of transit, and the accessibility of jobs and amenities such as grocery stores, dry cleaners, daycare and movie theaters--are actually more highly correlated. Characteristics of place influence demand and help determine how residents get around, where they go, and how much they spend on transportation.

But these combined costs aren’t considered by lenders when they score individual home loan applications. Neither are they considered in the housing affordability standards used to allocate low-income housing tax credits or vouchers for other affordable housing programs. Reframing nationally accepted affordability measures to combine both housing and transportation costs into one measurement of overall affordability could allow low-income households to more easily qualify for homeownership and provide a substantial incentive to the private sector to invest in transit-oriented locations.

For these reasons, in January 2006, the Center for Transit-Oriented Development and the Center for Neighborhood Technology (CNT) released the Housing & Transportation Affordability Index (H+T Affordability Index). The Index was created through the Brookings Institution Urban Markets Initiative with additional support from the McKnight and Surdna Foundations. This new Index is already being applied to the Minneapolis-St. Paul region to inform the policy debate about new transit investment, job growth, and housing affordability. The Center for TOD and CNT are working to broaden the application of the Index for at least 40 additional metropolitan areas in late 2006 or early 2007.  Detailed findings for the Chicago metropolitan region will be released in late June, and CNT is working with several other regions, including Atlanta and Champaign-Urbana, to apply the analysis to those areas. The National Housing Conference’s Center for Housing Policy will also soon release a report by CNT that uses the Index to compare housing and transportation costs across 28 metropolitan regions for working households.

The Affordability Index provides a new information tool that quantifies, for the fist time, the impact of transportation costs on the affordability of housing choices. This new Index provides consumers, policy-makers, lenders and investors with the data needed to make better decisions about which neighborhoods are truly affordable, and illuminates the implications of their policy and investment choices. In short, it provides the missing information to help rethink the issue of true housing affordability.

Affordability Index = (Housing Costs + Transportation Costs) / Income

The Affordability Index calculates the percent of income spent on housing and transportation costs combined. When calculating the Affordability Index of a neighborhood, the sum of average housing costs plus average transportation costs for a neighborhood (represented by a U.S. Census block group) is divided by average neighborhood income. This is the simplified formula for the Index, where total housing costs include current housing sales prices and rents and total transportation costs equal the sum of the costs for auto ownership, auto use, and transit. The results of the Index, applied to the Twin Cities metropolitan area (see Table 1), show that affordability is significantly impacted by improved access to high quality transit service, access to jobs, and the availability of mixed-income housing. Midway and Longfellow/Seward are neighborhoods located relatively close to the downtowns of St Paul and Minneapolis. Fridley is an older suburban community and a potential stop along a future commuter rail line that is being proposed for the region. Until recently Farmington was primarily a rural town, but is now experiencing tremendous growth as it becomes home to commuters seeking affordable housing on the metropolitan edge.

Table 1.Housing and transportation costs in the four Twin Cities areas

	Farmington	Fridley	Midway in St. Paul	Longfellow/ Seward in  Minneapolis	Seven-county region
Median income	$43,443	$59,196	$39,601	$32,909	$54,304
Average annual transportation costs	$13,860	$10,526	$8,378	$6,995	$10,989
Transportation costs as % of income	32%	18%	21%	21%	20%
Average housing cost as % of income	22%	13%	17%	22%	20%
Housing and transportation costs for homeowners	54%	31%	39%	43%	40%
Housing and transportation costs for renters	47%	30%	37%	39%	35%

 

Reducing transportation costs through investments in transit that allow households to have greater transportation choices is an important part of the affordability equation. Similarly, locating affordable housing near transit corridors is also critical to providing affordable lifestyles for low-income families who may be particularly transit-dependent. A number of states are already linking the allocation of Low Income Housing Tax Credits to areas served by transit, which is an effective first step to bridging housing and transportation.

There are many reasons to focus public policy and funding on transit-oriented development and enable the private sector to exploit this window of opportunity to accommodate more housing near transit. As a growing number of communities simultaneously struggle with increasing traffic congestion and a lack of affordable housing for low-income and moderate-income families, transit-oriented development can be an important tool in creating places that provide people not only with transportation choices, but that also help households realize savings from living near transit that can be used to purchase a home, build wealth, or for other household needs. People must make their own decisions about where they want to live, but it is important to provide them with the information they need to better understand the trade-offs between places.

For more details on the Affordability Index, its methodology and application in the Twin Cities metropolitan area, visit www.reconnectingamerica.org.

Mariia V. Zimmerman is Vice President for Policy, Reconnecting America and the Center for Transit-Oriented Development.