volves complex and highly technical issues. Many of the approaches involve accounting for the flow of services that owners obtain from their homes by adding a “rental equivalence value,” or “imputed rent,” to homeowners’ incomes that would also be consistent with the value of housing represented in the thresholds. These terms refer to the estimated amount of money owners would receive if they rented their homes. The value added is net of owners’ spending on their mortgages, property taxes, and maintenance costs. The thinking is that if the rental equivalence value is not added to the homeowners’ incomes, then people who own their homes with low or no mortgages would appear to be no better off than renters or homeowners with higher costs. Taking this value into account potentially affects the elderly the most, since they are the people most likely to own their homes. Recent research suggests that the elderly poverty rate is relatively lower when owner-occupied housing is accounted for.
Given the uncertainty of data quality and the complexity of the calculations involved in estimating rental equivalence values, the 1995 NRC report did not recommend incorporating the value of housing in a new measure right away, but it urged that high priority be given to research to develop data and methods that could produce reasonable rental equivalence values.
Since the NRC report, several alternatives for accounting for the value of owner-occupied housing in a new measure have been suggested and evaluated. One approach involves estimating the rental equivalence value for homes that are owned, as mentioned above. More specifically, it first involves determining the rental value of a home. This value is used in the construction of the thresholds (the portion for which housing needs are determined). Then, in order to create a measure of families’ resources that is consistent with the value of housing represented in the thresholds, “net implicit income” is added to homeowner’s incomes. Net implicit income equals the implicit rent homeowners would receive for their homes, minus the costs to maintain them, plus price appreciation. For homeowners with no mortgages, this method can potentially add substantial amounts to their computed incomes, making them less likely to be classified as poor. Several statistical techniques can be used to determine rental equivalence, such as using rental equivalence values reported in surveys or through statistical modeling (see Garner, 2004).
A second approach for incorporating the housing value of owner-occupied housing is to determine the “user cost of capital.” When constructing thresholds, which are based on expenditure data, the user cost of