National Academies Press: OpenBook

Measuring Poverty: A New Approach (1995)

Chapter: Home Ownership Services

« Previous: Child Support Payments
Suggested Citation:"Home Ownership Services." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 244
Suggested Citation:"Home Ownership Services." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 245
Suggested Citation:"Home Ownership Services." National Research Council. 1995. Measuring Poverty: A New Approach. Washington, DC: The National Academies Press. doi: 10.17226/4759.
Page 246

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DEFINING RESOURCES 244 child support obligations. A recent estimate (Sorenson, 1993), using data from the 1990 SIPP panel, was that 14-18 percent of men aged 18-54 were noncustodial fathers. The range (rather than one number) comes from two factors —nonresponse to the question on parenthood and an apparent undercount of black noncustodial fathers relative to black custodial mothers. About 44 percent of noncustodial fathers paid child support, and, on average, the payments accounted for about 9 percent of their families' incomes (calculated from Sorenson, 1993: Table 3).36 The current poverty measure counts child support payments as income to the recipient families, but it does not subtract such payments from the income of the payers. Yet child support payments, which are not discretionary in the sense that gifts of money to another household would be, cannot be used to support consumption by members of a payer's current family. For consistency, we propose to subtract child support payments from the income of the paying family (and to continue to count them as income to the recipient family). The March CPS does not ask about child support payments to another household, and no information is available with which to make a reasonable imputation. The addition of one two-part question—whether the respondent pays child support and, if yes, how much—would remedy this deficiency. SIPP, in contrast, has regularly asked about child support payments, and we used SIPP data to estimate the effect on the poverty rate of subtracting child support payments from the payer's income (see Chapter 5). Home Ownership Services Economists have long argued that estimates of families' economic resources, to be comparable for renters and homeowners, need to take account of the flow of services that owners obtain from their homes. Thus, analysts who estimate resources by using a consumption definition almost always add the rental equivalence value (or ''imputed rent") for homeowners to their other expenditures. The value added is net of owners' actual outlays for mortgage principal and interest, property taxes, and maintenance costs (i.e., nothing is added if owners already have mortgage, tax, and maintenance expenses that equal or exceed the estimated rental equivalence value). The intent is to measure housing consumption in a comparable manner for renters and owners by estimating what an owner would have had to pay in rent (not including public transportation, the reported annual amount divided by 12 for all other expenses (e.g., uniforms), and the reported weekly miles driven to work times the 1987 IRS mileage allowance of 22.5 cents per mile. Mean and median values for all workers were then updated for price changes to 1992. 36 Presumably, some noncustodial mothers also pay child support, but Sorenson's analysis was restricted to men.

DEFINING RESOURCES 245 utilities). If the rental equivalence value is not added to homeowners' consumption, then people who own their homes outright or who have housing costs below the rental value of their homes would appear to consume less than renters or homeowners with higher costs.37 The same logic applies to resource estimates that are based on an income definition, namely, that people with low or no mortgage payments or other homeownership costs should have a rental equivalence value added to their income to recognize the fact that they do not face the same housing costs as renters or other homeowners. The concept of imputed rent is hardly intuitive or palatable to many people, yet, theoretically, the case is unarguable: owners with low housing costs have more of their income available for consumption of other items (e.g., food) and, hence, not to include imputed rent is to underestimate their income relative to their poverty threshold. The imputed rent value would be net of mortgage and other costs that do not exceed the amount of imputed rent: that is, we do not suggest that homeowners who assume mortgage payments that exceed the rental value of their home obtain a deduction from income. An alternative would be to develop separate thresholds for owners with low or no housing costs and other owners and renters. Data from the 1991 American Housing Survey indicate that 39 percent of low-income households own their homes, compared with 68 percent of other households.38 Among low-income households headed by someone aged 65 or older, 61 percent own their homes, compared with 81 percent of other households headed by someone aged 65 or older (Grall, 1994: Tables 4,5). The question is what proportion of low-income homeowners would likely have significant amounts of imputed net rent added to their income. A high proportion of low-income homeowners—66 percent—do not have a mortgage. However, a large proportion of low-income homeowners who do not have mortgages (62%) nonetheless have housing costs (for property taxes, insurance, and utilities) that are 30 percent or more of their income (34% have housing costs that are 50% or more of their income). An even higher proportion of low- income homeowners who have a mortgage (89%) have housing costs that are 30 percent or more of their income (65% have housing costs that are 50% or more of their income) (Grall, 1994: Tables 5,11,12). Overall, perhaps one-fourth of low-income homeowners could have significant 37 Similarly, consumption-based resource estimates typically include the estimated service flows from automobiles and consumer durables (and, correspondingly, exclude actual expenditures on these items). 38 The AHS "low-income" measure is not the same as the current poverty measure: it uses the official poverty thresholds, but it defines the unit of analysis as the whole household, not the family, and it measures income for the 12 months preceding the interview, which is not necessarily a calendar year. There are other differences as well (see Bureau of the Census, 1991).

DEFINING RESOURCES 246 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.

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Each year's poverty figures are anxiously awaited by policymakers, analysts, and the media. Yet questions are increasing about the 30-year-old measure as social and economic conditions change.

In Measuring Poverty a distinguished panel provides policymakers with an up-to-date evaluation of:

  • Concepts and procedures for deriving the poverty threshold, including adjustments for different family circumstances.
  • Definitions of family resources.
  • Procedures for annual updates of poverty measures.

The volume explores specific issues underlying the poverty measure, analyzes the likely effects of any changes on poverty rates, and discusses the impact on eligibility for public benefits. In supporting its recommendations the panel provides insightful recognition of the political and social dimensions of this key economic indicator.

Measuring Poverty will be important to government officials, policy analysts, statisticians, economists, researchers, and others involved in virtually all poverty and social welfare issues.

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