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Measuring Poverty: A New Approach
amounts of imputed net rent added to their income that could possibly raise them above the poverty line (those owning their homes free and clear with other housing costs less than 30% of income). These homeowners represent one-tenth of all low-income households.
Although, for consistency, imputed net rent should be added to homeowners' income for purposes of poverty measurement, the idea is not easy to implement, at least not in the near term. Rental equivalences can be determined by asking owners what they think their houses would bring in rent. The CEX includes such questions, which could be added to SIPP or the March CPS, but the responses are likely to be subject to reporting errors. Another method is to collect data on housing characteristics (a topic not currently covered in SIPP or the March CPS) and, by means of hedonic regression equations, estimate rental equivalences for houses of particular types (e.g., with one, two, or three bathrooms, with or without air conditioning, etc.). This method requires asking a large number of questions of renters, including net rent and characteristics of their housing for input to the regressions, and also of owners, including characteristics of their housing for imputing rental equivalence from the estimated regression coefficients. With either method, homeowners must be asked about their mortgage payments and property taxes in order to make a net calculation; SIPP obtains this information but the March CPS does not.
Finally, some analysts argue (see, e.g., Ruggles, 1990) that it may not always be appropriate to base imputed rent on the characteristics of one's current home. Thus, many elderly people who have paid off their mortgages or have low payments continue to live in homes that are larger than their current needs. It would seem inappropriate to impute a full rental value for a larger-than-needed home, although it is not clear what type of downward adjustment to the value would be appropriate. One approach would be to cap the amount of imputed rent at the level of the housing component of the poverty thresholds to recognize that the imputed rent offsets housing costs but does not represent additional money that is actually available for other consumption.
Given the practical difficulties, we do not propose that the income calculated for a family for purposes of poverty measurement now include imputed rent. However, we urge that high priority be given to research to develop data and methods that could make possible a reasonably accurate calculation of imputed net rent. The next regular review of the poverty measure should give serious consideration to revising the income definition to include imputed net rental values in homeowners' income.