Landlords have been relying on the archaic rent-to-income ratio of 30% of a tenant’s net monthly income to be allocated towards the rent expense. Increasingly, however, there are more cases where tenants are paying much more than this benchmark due to the rising cost of living and low supply of affordable housing.

To get a better understanding of the nuances of this industry benchmark, we interviewed Henry Gascon, the co-author of the annual report, ‘Struggling to Stay Afloat: The Real Cost Measure California 2018’ and the Director of Policy and Programs at United Way of California. The report states that nearly 4 in 10 households in California pay more than 30% of their income on housing.

Listen to our conversation with Henry to learn about the renewed metric for financially validating a tenant, that captures not only housing costs, but the macroeconomic factors such as the rising cost of living and low supply of affordable housing.

[4:00] Naborly: As the Director of Policy and Programme Development, one of your key mandates research, planning and execution around the ‘Struggling to Stay Afloat’ report; how has this report changed the perception of financial stability in California?

Henry Gascon: The Real Cost Measure is a new financial stability report for the state of California. We found that the official poverty measure in the US is very inadequate; for example, it was founded in the 1960’s during the Lyndon Johnson era. Of course, if you are going to have a War on Poverty, you need something to measure it by.

There is a famous story about Molly Orshanski, who calculated that the cost of food would take into account the holistic cost of a family’s expenses, so ever since then, we’ve been using the cost of food adjusted for by inflation.

What this metric does not account for, of course, is the cost of housing, healthcare, childcare, transportation, and all of the other basic needs that a family needs to survive.

We’ve created a new poverty measure called the Real Cost Measure which reflects the real cost of living in California. We’ve been using this outdated formula to make critical decisions like federal program eligibility and welfare requirements. But the fact is that we didn’t think that it was an accurate measure of financial stability of the real cost that families face everyday.

[6:23] N: With respect to housing specifically, the general rule of thumb for Rent to Income is 30%. Your report states that 4 in 10 homes in California actually pay more than this. What does that say about the credibility of the metric, or is it a metric that we should be replacing?

H: Right, so what you are referring to here is housing burden, or the percentage that a household allocates towards housing. And yes, up to 38% of households spend more than easily 50% of their income on housing. The poorer you are, some of them can spend of up to 80% of their income on housing.

Almost 38% of households spend more than half of their income on housing

On average in California, the Official Poverty Measure is usually around 14% in any given time. We find that a third of families are struggling to make ends meet - when you take into account all of housing, transportation, healthcare.

We’re seeing housing prices in major metropolitains, not just in California but for example in New York, increase significantly. Part of that conversations creates the question: are people actually moving? Are people actually moving to find more affordable housing.

We’ve seen that in Los Angeles county where people can find more affordable housing. But that comes at a great cost, but they will retain their existing jobs to creates transportation problems with respect to a longer time to get to work - as they are now spending two to three hours per day on transportation, just so they can keep their existing job.

[10:22] N: One of the statistics that you just quoted from the report that strikes me is that families can not only spend more than 30% of their household income on housing, but of up to 60-80%. For households in these dire situations, what can they do? What sources of alternative funding or resources can they or should they rely on?

H: One of the biggest challenges that these families face is inconsistent income during the calendar year. How does money come in and out any given year? For example, if you look at a family in retail or the manufacturing industry, leading up to the holidays you will see a spike in salary, and then after the new year, the hours are cut after the holiday season where there is a slight decline, after spring around tax season, you see another peak with tax benefits. Hence, lots of income volatility. As a result, you will see that households just need to make hard choices.

Check out United Way’s Interactive Household Budgets

[16:00] N: Credit does not give a holistic view of a person's financial status, which is part of the impetus for Naborly. With respect to the use of credit in the rental market, do you think that credit provides a full picture of one’s financial status?

H: I understand that landlords often ask for one’s credit record, as it’s one of the most common things to ask. To be able to access credit is a big challenge, and for instance, some families need to rely on payday lending firms in order to access funds to make ends meet in any given month. And if they don’t pay them consistency and on time, it will negatively affect their FICO score.

It’s important to understand the daily changes that people face everyday. We find that 72% of single mothers are below the real cost measure. It speaks to not only the financial burdens, but the emotional burdens - you are not just the breadwinner but the entire emotional support system. And often these parents work 2-3 jobs in a given year and at varying hours, which inhibits them to spend proper time with their children (after school).

[20:33] N: Policy and government always plays a huge role in housing in any metropolitain: can you speak to some city-wide or statewide policies which have given tenants more power in the real estate game?

H: During Lyndon Johnson’s War on Poverty, it was relatively accessible for families to buy homes, especially the middle class. As time has gone on, the housing stock has shifted and the cost of living has increased since the 60’s.

Since 1997, California’s GDP has increased 143%, but the median household earnings for average Californian’s has only increased 13% during that same amount of time. Thus, the price of goods and services continue to increase but for the most part, the middle class hasn’t gotten a rise since the 1970’s. When you lay our housing on top of that, it makes affordability much harder to attain.

In L.A., you have 60,000 homeless people on any given night, two-thirds of whom are unsheltered. A big part of it is because of the housing problem, and the lack of affordable housing - it’s not just the need to build new but to convert existing to make it more housing accessible and affordable for families. This is a big challenge that California is experiencing today.

Here at United Way, we are often an agent that brings unlikely communities and agents together. For example, we bring housing developers, elected officials, non-for-profits, to come together to talk about the cost of living. What we’ve found is that many of these stakeholders have never even met each other before.

[25:27] N: What would you suggest or recommend to new landlords in California when they are looking for their next tenant?

H: The last thing we want to create are market inefficiencies within the housing market and obviously it is an inefficiency for landlords to have empty apartments sitting there without being able to gain revenue month after month. It is also an inefficiency from a tenant’s perspective in not being able to find the right house.

It’s important to help existing tenants in maintaining their tenancy. What I mean by that is, according to the report, many of these tenants are usually one to two paychecks away from being able to afford the monthly housing rent.

If landlords can be more attuned to that, in respect to asking if there are other things that we can do to help them? So, can we connect them to other jobs and services in our area, can we help invest in a job fair, or even looking at a communal child care facility to makes the lives of these families easier.

Learn more about how you can get a Naborly Report on your prospective tenants for free with Naborly.