How Are HUD’s Income Limits Calculated?

About Income Limits: An Interview with Peter Kahn

In this column, Peter Kahn, Director of PD&R’s Economic Market Analysis Division, talks about HUD's Income Limits.

Subsidized housing in New Orleans, Louisiana. Image courtesy of the U.S. Department of Housing and Urban Development.

Thank you for giving me the opportunity to answer some questions about HUD’s income limits. When we talk about income limits, we are actually talking about two income parameters; one of them is HUD’s estimate of median family income, and the other involves the income limits derived from that estimate. HUD calculates a median family income for each metropolitan area and each nonmetropolitan county throughout the country. We use American Community Survey data as the basis for our calculation. For Fiscal Year 2015, the 2012 American Community Survey data was the latest available for our purposes. So we take the 2012 American Community Survey data and we assign to each metropolitan area and each nonmetropolitan county the appropriate median income data and we have to inflate that 2012 figure to the midpoint of the 2015 fiscal year for which the income parameters are effective. To do this, we use a combination of actual CPI and a forecast of the Consumer Price Index, published by the Congressional Budget Office, in order to make the program parameters effective for Fiscal Year 2015.

Income limits are used in various ways. The primary purpose for their creation was as an operating parameter in HUD’s rental assistance programs. Income limits are used to determine the income qualifications for families applying for rental assistance, primarily in HUD’s Section 8 and public housing programs. However, we have documented at least 10 other HUD programs that use our income limits and 14 other federal programs that use some variation of HUD’s income limits. One of the most well-known programs that uses HUD’s income limits is the Low-Income Housing Tax Credit (LIHTC) Program. LIHTC uses income limits to determine who qualifies for the subsidized units and to define and set the maximum rents that can be charged.

There are two changes that I would like to talk about regarding the 2015 income limits, the first being the timing of their release. For many years, the release of income limits happened in the early spring. In 2012, HUD shifted the projected delivery of income limits to December 1 to better serve the needs of our customers. The Consolidated Appropriations Act of 2014, however, changed the way HUD is required to calculate extremely low-income limits. Prior to the changes in the Appropriations Act, HUD based the extremely low-income limits on 30 percent of the area median income. These limits are now based on 30 percent of median income or the federal poverty guidelines, whichever is greater. The annually updated federal poverty guidelines are released during the third week of January. Consequently, HUD has to wait until the federal poverty guidelines are released before incorporating them into our process to comply with the act’s requirements. Therefore, I anticipate that going forward, HUD’s income limits will be published annually in late February or early March.

I would also like to discuss a change to the methodology that HUD is using to calculate the trend factor. As I mentioned earlier, the trend factor takes this program parameter from the end of actual data to the midpoint of the fiscal year for which the income limits are effective. In previous years, we based our calculation on an annual average of the change in U.S. median income as measured over the past five years. Unfortunately, over the most recent 5 years, the economy has been subject to a fairly severe recession, during which there has been little growth in median family incomes. HUD didn’t feel that this backward-looking approach to the trend factor actually captures what is expected to happen with income growth over the next year or so, and so we are now using a forecast of CPI published by the Congressional Budget Office to inflate the estimates from the endpoint of the actual data to the midpoint of the fiscal year for which they are effective.

And lastly, while it is not new, I would like to put in a plug for our income limits briefing materials document, which is one of the primary ways my office communicates its calculation methodology as well as the uses of income limits and median family income estimates. It is available on the income limits data sets page of the HUD USER website and contains a wealth of information for people interested in how the income limits are calculated and how they are used.

In December we put a note on the main income limits page of the HUD USER website saying that due to the change in the Consolidated Appropriations Act, the income limits wouldn’t be available until February. Due to some internal clearance hurdles, we got the income limits out just after the end of February, on March 6. And we are hopeful that we will be able to become more efficient as time goes on, but the February or early March timeframe that was announced on HUD USER is the likely period for the release going forward.

My pleasure.