HUD’s Fair Market Rents and Income Limits

HUD’s Fair Market Rents and Income Limits

By Daniel Dorfman (PD&R: 2022 to Present), Peter Kahn (PD&R: 2005 to Present), Jessica Remington (PD&R: 2022 to Present)

Each of HUD’s major program offices (Community Planning and Development, Housing, and Public and Indian Housing) oversee various programs that require operating parameters to govern the operations of each program. Although Congress provides the statutory basis and, more important, the funding for these offices, many of the annual operating parameters are calculated by HUD’s Office of Policy Development and Research (PD&R).

Many people’s sole interaction with HUD is their annual pilgrimage to the HUD User website to obtain the updated program parameters that PD&R generates. The two most commonly used program parameters are HUD’s Income Limits (ILs) and Fair Market Rents (FMRs). At their most basic levels, ILs set maximum income thresholds for program eligibility, and FMRs help determine the amount of rental assistance a family will receive.

HUD’s preeminent tenant-based rental assistance program is the Housing Choice Voucher (HCV) program. Both ILs and FMRs are primary operating parameters for the program. FMRs are designed to set a rent subsidy limit that allows households to access an adequate supply of modestly priced rental units in a housing market; that is, the lower-cost 40 percent of the market. A key feature of FMRs is that they are gross rent estimates that include the shelter rent as well as the cost of all necessary utilities.

Information collected by the U.S. Census Bureau has been HUD’s primary source of data for calculating FMRs and ILs. Processing time for decennial census data from 1970, 1980, and 1990 was typically measured in days rather than the seconds it takes today. Although PD&R had economists and social science analysts on staff at the time, PD&R also had staff who understood the socioeconomic information available through the decennial census long-form data as well as how to use the mainframe to parse that information across the many magnetic tapes that held these data. Interestingly, although PD&R staff have always been responsible for calculating FMRs and were always listed as technical contacts within the Federal Register notices announcing FMRs, PD&R did not issue FMRs under its own signature until fiscal year (FY) 2007.

Fair Market Rents

HUD’s FMRs have a long history. HUD developed the first FMR schedules in 1975 based on updated 1970 decennial census data. In 1979, HUD began supplementing 1970 census data with American Housing Survey (AHS) data to develop FMRs. The AHS-based FMR estimates were established at the midpoint (50th percentile) of the rental housing distributions for local areas based on a sample of units occupied by “recent movers”— households that had moved into their units within the past 2 years. PD&R included only rental units that met the Section 8 housing quality standards in its FMR calculations. Because the most recent AHS data were several years old, the rents obtained from the surveys were updated using Consumer Price Index (CPI) surveys of residential rent and utilities for selected metropolitan areas and Census regions.

In 1982, HUD changed its recent mover FMR standard from a 50th percentile FMR to a 45th percentile FMR, and introduced a new definition of standard quality units to exclude the public housing and recently constructed units that represented the lower and higher ends, respectively, of the rental housing market. Other changes included the establishment of higher FMRs for units with more than two bedrooms to successfully place greater numbers of large families.

In 1995, HUD further lowered FMRs from the 45th percentile to the 40th percentile of the rental housing distribution as a cost-saving measure. The Quality Housing and Work Responsibility Act of 1998 merged the Section 8 certificate program with the voucher program to create a single tenant-based program called Section 8 vouchers. One of the new law’s innovations was to allow public housing agencies to base the subsidy amount on a payment standard ranging from 90 percent to 110 percent of FMR. In 2000, HUD issued an interim final rule permitting the use of 50th percentile FMRs in certain metropolitan areas as a tool to help redistribute voucher families from FMR areas where they were highly concentrated.

Unfortunately, FMRs are frequent targets of criticism. One commonly used criticism is that FMRs “are neither fair nor market.” The lack of timely and relevant government data made measuring current market conditions extremely difficult. HUD attempted to account for more substantive local changes in rental markets between decennial census administrations with a program of rotating metropolitan and regional random digit dialing (RDD) telephone rent surveys in the 1990s and early 2000s. RDD surveys, however, became increasingly less feasible with the growth of mobile phones and geographically transferrable telephone numbers. Concerns about timeliness began to ease in 2005 with the creation of the American Community Survey (ACS). ACS is a large annual household survey that collects information on the social, economic, and housing characteristics of the U.S. population. Conducted by the U.S. Census Bureau, the ACS was designed to replace the long-form survey conducted with each decennial census through 2000. PD&R began to incorporate ACS data into the FMR calculations in 2007 with the release of the FY 2008 FMRs. PD&R increasingly relied on ACS data to calculate FMRs until FY 2012, when 5-year ACS tabulations collected between 2005 and 2009 replaced 2000 decennial census data. The introduction of the ACS marked a turning point in FMR history, because the ACS allowed HUD to use localized rent estimates for every area of the country that were updated annually rather than every 10 years. The ACS also reduced the timeframe necessary to inflate the source data to the publication fiscal year from as much as a decade or more to under 3 years.

Over the subsequent decade, HUD embarked on a research program to continually update and improve FMR estimation methodology. For example, HUD previously relied on extrapolating historical growth in the national median gross rent to adjust FMRs to the fiscal year in which they were published. Beginning in FY 2016, HUD began using a statistical model to forecast CPI gross rents at the national level. In FY 2020, HUD introduced localized forecasts based on CPI metropolitan areas and Census regions.

Small Area Fair Market Rents

Like FMRs, Small Area Fair Market Rents (SAFMRs) determine the amount of rental assistance that eligible low-income families receive. Unlike FMRs, which apply to entire metropolitan areas, SAFMRs apply at the ZIP Code level within metropolitan areas. As a result, within a single metropolitan area, SAFMR rates are higher in neighborhoods with higher rents and lower in neighborhoods with lower rents. HUD aims to use SAFMRs to reduce voucher concentration in high-poverty areas and provide voucher recipients with more housing choices in areas of greater opportunity, with access to better schools and employment options. Using SAFMRs is a cost-effective way for voucher holders to move to higher-opportunity areas without significantly raising overall subsidy costs.

SAFMRs were introduced in 2011 as a pilot program in the Dallas, TX, HUD Metropolitan FMR area in response to a lawsuit alleging that the HCV program promoted racial segregation. In 2012, SAFMRs were expanded to five other metropolitan areas as part of a HUD demonstration. The pilot program was deemed successful, and, in 2016, HUD issued new criteria under which SAFMRs would become mandatory in certain metropolitan areas.

Several studies of SAFMRs have found that they achieve their primary goal of increasing opportunities for voucher holders in high-rent, high-opportunity areas. A 2018 study from New York University’s Furman Center found that “switching to small-area FMRs would expand options for voucher holders in high-rent zip codes and reduce them in low-rent zip codes.” However, underlying issues of inequality persist. A 2018 study from the University of Pennsylvania found “evidence of improvements in the location outcomes of Black and Hispanic voucher households because of the use of ZIP code-based rent limits, but that these results are only marginal with respect to the persistent disparities in outcomes based on race within the voucher program.”

Challenges for FY 2023

HUD bases its FMR calculations on updated ACS data that are approximately 3 years old from the time of collection to publication. FY 2023 FMRs, for example, ordinarily would be based on data from the most recently released 2020 ACS. In late 2021, however, the U.S. Census Bureau announced that it would not release its standard 1-year estimates from the 2020 ACS because of COVID-19’s impact on data collection. Further complicating matters was the rental housing market’s unusual volatility during 2020 and 2021, as measured by many private data sources. These unprecedented challenges called for unprecedented changes to FMR calculations. After considerable research and public comment, HUD decided to incorporate private rental market data into its FMR calculations for the first time. Not only did this change help correct for the lack of available 1-year ACS data, but it also better reflected and localized rental market conditions. The result was notable: the national average FMR for a two-bedroom unit increased 10.4 percent, from $1,284 to $1,418, nearly double the typical annual increase. These FMRs will be critical for helping low-income families access affordable housing in areas with rising rents.

Where We Go From Here

These methodological changes are in effect only for FY 2023, because HUD will have access to the 2021 ACS for calculating the FY 2024 FMRs. Any further changes would require HUD to once again issue a Notice of Proposed Material Change. However, HUD continues to evaluate both public and private data sources internally and sponsor external research to improve various aspects of FMR calculations.

Median Family Income and Income Limits

Among the high-profile parameters that PD&R develops each year are median family income (MFI) estimates and ILs. Federal law requires HUD to set ILs that determine the eligibility of applicants for HUD’s assisted housing programs, with adjustments for family size and for areas that have an unusually high or low relationship between housing costs and family incomes. HUD’s Section 8 ILs begin with the production of MFI estimates. As with FMRs, HUD traditionally relied on decennial census data as the source data for MFI estimates. HUD used MFI data updated using various measures of earnings and income from the U.S. Bureau of Labor Statistics and U.S. Census Bureau. HUD’s MFI estimates and ILs, like its FMR calculations, became based solely on ACS data beginning with the FY 2011 ILs.

Federal statute sets three levels of income limits that define income eligibility for HCV and other programs: low-income, very low-income, and extremely low-income limits. Very low-income families are defined as families earning incomes that do not exceed 50 percent of the area’s MFI, and low-income families are defined as families earning incomes that do not exceed 80 percent of the area’s MFI. Extremely low-income limits were established as part of the Quality Housing and Work Responsibility Act of 1998, which based the new income limit standard on 30 percent of MFI. Because of statutory changes made in 1999, HUD clarified that the calculation of low-income and extremely low-income limits would be tied to the calculation of very low-income limits. The Consolidated Appropriations Act of 2014 further modified and redefined the extremely low-income limits to ensure that they would not fall below the Federal poverty guidelines determined for each family size. Within the HCV program, low-income families are eligible for assistance, but HUD regulations stipulate that 75 percent of new participants admitted to the program through public housing agencies must be extremely low-income families.

As previously discussed, federal statute defines ILs as they relate to MFIs. However, in the parlance of the affordable housing industry, the most frequently used term is area median income (AMI). AMI refers to the income level that divides a population income distribution of an area in half, with one-half of the population earning more than that amount and one-half earning less. Within the affordable housing industry, however, AMI generally refers to HUD’s MFI estimates, and when used in conjunction with percentages or qualified by family size, AMI refers to HUD’s ILs, most of which derive from the very low-income limits.

Although FMRs may be the more well known of these two program parameters, numerous programs nationwide employ HUD’s ILs, including, at last count, 26 uses by HUD and other federal offices. The broadest use of ILs is for calculating income eligibility and maximum rents for rental housing financed with low-income housing tax credits (LIHTCs).

HUD continues to calculate the best possible estimates of area MFIs and their associated ILs using the most current data available to support successful program operations.

Explanations Behind the Data

One significant innovation in bringing FMRs and ILs to the public came in response to a U.S. Government Accountability Office Report from 2005 (GAO-05-342) that pointed out that HUD’s FMR calculation process “does not follow its objectivity guideline for ensuring the transparency and reproducibility of its FMR estimates.” In essence, the report asserted that the calculation method HUD used to determine FMRs was a black box. In response to GAO’s criticism, HUD created an online documentation system that details each data element used to calculate an area’s FMR and presents each calculation in the process for every FMR area in the country. This documentation system first launched with the FMR release for FY 2005, and each subsequent FMR release has a commensurate system. Although no reports made similar black box accusations against HUD’s methods for calculating area MFI estimates or their related ILs, HUD developed a complementary documentation system for these program parameters beginning with the release of the FY 2007 ILs and their annual accompaniments. Each documentation system is available on the appropriate HUD User datasets page under the Query Tool link.

FMR references

• “HUD's Fair Market Rents: Do They Reflect Prevailing Rents?” Hearing Before a Subcommittee of the Committee on Government Operations, House of Representatives, Ninety-Ninth Congress, Second Session, 27 February 1986. United States: U.S. Government Printing Office, 1986.

• James R. Follain. 1978. “How Well Do Section 8 FMRs Match the Cost of Rental Housing? Data From 39 Large Cities,” Working Paper 249-15, U.S. Department of Housing and Urban Development.

• U.S. Department of Housing and Urban Development, Office of Policy Development and Research. 2020. “HUD’s Office of Policy Development & Research Biennial Report: FY 2019–2020.”

MFI/Income limit references:

• U.S. Department of Housing and Urban Development, Office of Policy Development and Research. n.d. “Income Limits.” Accessed 4 April 2023.

• Chalita Brandly. 2019. “Extremely Low-Income: Has the New Measure Made a Difference?” Cityscape 21:3, 389–409. https://www.huduser.gov/portal/periodicals/cityscpe/vol21num3/ch20.pdf