June 23 -- The Office of the Assistant Secretary for Policy Development and Research, HUD, invites comments by July 24, 2023 on proposed changes for calculating Fair Market Rents (FMRs) for FY2024.
The United States Housing Act of 1937 (USHA) requires the Secretary to publish FMRs periodically, but not less than annually, adjusted to be effective on October 1 of each year. The primary uses of FMRs are to determine payment standards for the Housing Choice Voucher (HCV) program, to determine initial renewal rents for some expiring project-based Section 8 contracts, and to serve as rent ceilings for rental units in both the HOME Investment Partnerships Program and the Emergency Solutions Grants Program and a primary rent standard option for the Housing for Opportunities for Persons With AIDS (HOPWA) program. HUD also uses FMRs in the calculation of maximum award amounts for Continuum of Care grantees and in the calculation of flat rents for Public Housing units. To better determine payment standards and related parameters for HUD programs, HUD proposes changes in how FMRs are calculated in this notice and seeks public comment on the proposed changes. This notice also responds to public comments that were submitted on the publication of Fiscal Year 2023 FMRs.
Section 8 of the USHA (42 U.S.C. 1437f) authorizes housing assistance to aid lower-income families in renting safe and decent housing. Housing assistance payments are limited by FMRs established by HUD for different geographic areas. In the Housing Choice Voucher (HCV) program, the FMR is the basis for determining the “payment standard amount” used to calculate the maximum monthly subsidy for an assisted family. See 24 CFR 982.503. HUD also uses the FMRs to determine initial renewal rents for some expiring project-based Section 8 contracts, rent ceilings for rental units in both the HOME Investment Partnerships program and the Emergency Solution Grants program, the primary rent standard for the HOPWA program, calculation of maximum award amounts for Continuum of Care recipients and the maximum amount of rent a recipient may pay for property leased with Continuum of Care funds, and calculation of flat rents in Public Housing units. In general, the FMR for an area is the amount that a tenant would need to pay the gross rent (shelter rent plus utilities) of privately owned, decent, and safe rental housing of a modest (non-luxury) nature with suitable amenities. HUD's FMR calculations represent HUD's best effort to estimate the 40th percentile gross rent paid by recent movers into standard quality units in each FMR area. In addition, all rents subsidized under the HCV program must meet reasonable rent standards.
From FY 2012 to FY 2022, HUD's methodology for calculating FMRs consisted of several steps (see:
https://www.huduser.gov/portal/datasets/fmr/fmrs/FY2022_code/select_Geography.odn for the calculations underlying each FY 2022 FMR). These steps were retained for FY 2023 FMRs but modified as described below. FY 2024 FMRs are proposed to follow the same multistep process, with further modification described subsequently.
1. Base Rent. First, HUD establishes a “base rent” for two-bedroom units from the 5-year 40th percentile estimates of gross rent from the ACS.
2. Recent Mover Adjustments. HUD then adjusts the base rent using a “recent mover adjustment factor” that is based on the ratio of the estimate of gross rent paid by recent movers from the 1-year ACS to the estimate of gross rent paid by all renters from the 5-year ACS for the smallest level of geography containing the FMR area that contains statistically reliable 1-year data. The results of these two steps are estimates of 40th percentile rents for recent movers in two-bedroom units that are “as of” the current ACS year.
3. Inflation Adjustment. HUD then accounts for inflation from the ACS year by applying a “gross rent inflation factor,” which is calculated from the Consumer Price Index (CPI) as produced by the Bureau of Labor Statistics (BLS).
4. Trend Factor. Because it calculates FMRs ahead of each fiscal year, HUD provides a further inflation adjustment in the form of a “trend factor.” The trend factor represents the expected future level of the gross rent CPI for the upcoming fiscal year compared to the most recent actual gross rent CPI.
5. State minimum FMRs. Additionally, HUD calculates state minimum FMRs based on the median FMR for non-metropolitan portions of each state.
6. Bedroom Ratios. HUD calculates FMRs for unit sizes other than two bedrooms by applying “bedroom ratios” calculated from the relationships between rents for units of different sizes according to the 5-year ACS.
7. Limit on Decreases. Finally, HUD does not allow an area's FMR to decline by more than 10 percent.
For FY 2023, HUD implemented several changes to its FMR methodology. This was done in part in response to the Census Bureau's decision not to release ACS 2020 1-year data, which HUD would ordinarily have used in FY 2023. HUD retained ACS 2019 1-year data and inflated those estimates using rent inflation factors to synthesize 2020 recent mover adjustment data. These inflation factors consisted of a weighted average of the CPI rent of primary residence series that HUD has traditionally used in FMR calculation, along with additional measures of rent inflation as produced by several private companies for markets where such data were available. HUD produced similar rent inflation factors calculated from CPI rent of primary residence data and private company rent data for the inflation adjustment through 2021 of the synthesized 2020 recent mover-adjusted rents.
HUD is proposing two material changes to the calculation of FMRs. The first would be a change in the definition of “recent mover” as used in the recent mover adjustment described in Section A. The second would be to retain and expand the use of rent inflation factors calculated by private sector sources as was first done for FY 2023 FMRs.
Because the 2021 ACS was not adversely affected by the COVID–19 pandemic in the way the 2020 ACS data collection was, the Census Bureau has released the usual full spectrum of 2021 ACS 1-year tabulations, and HUD does not need to synthesize recent mover adjustment data as in the FY 2023 FMRs. The discussion of the proposed change to the definition of “Recent Mover” below is in the context of restored normal data availability. . . .
HUD has historically updated the latest ACS-based rent estimates with one year of gross rent inflation measured with the 24 local and 4 regional CPI components rent of primary residence and household fuels and utilities, depending on the location of the FMR area. Unlike the gross rent estimates HUD uses from the ACS, the CPI is produced by measuring the change in rents across all types of renters, ranging from households that have recently moved into their unit to those that have lived in their current unit for many years. Recent research has examined the difference between the overall CPI for shelter rent (overall rent CPI) and an alternative CPI constructed using only survey responses from households that are new tenants (new tenant CPI).
The research shows that the two indices tracked closely over the period from 2005 to 2020; however, they diverged significantly since then as rent increases for new tenants outpaced overall rent inflation. The research further shows that the new tenant CPI tracks closely with the reported rent inflation as produced by two companies, CoreLogic and Zillow, despite the differences in scope and methodology among the three sources. Finally, the researchers quantify the difference between the new tenant CPI and the overall rent CPI and find that the overall rent CPI lags rent inflation for new tenants by one year.
HUD has replicated the correlation between the new tenant CPI and private sources using the additional private rent data available to the Department and the results confirm that rent inflation factors derived from these data track the new tenant CPI closely. HUD is completing further analysis to determine if the use of rent inflation factors derived from these private data is the best course of action. Additionally, based on the lagged nature of the overall rent CPI, HUD is considering alternatives to including the CPI rent inflation factor alongside the private inflation factors as it did for FY 2023. One option HUD proposes is to calculate a shelter rent inflation factor consisting only of the average of multiple sources of private rent data. Alternatively, HUD could develop a new adjustment procedure for the CPI rent inflation factor based on private inflation factors. HUD proposes to maintain the FY 2023 requirement that an area must be covered by at least three private sources of rent data to use such an average. The average shelter rent inflation factor would be combined with the CPI fuels and utilities subindex to produce an overall gross rent inflation factor. This factor would be applied to the recent mover-adjusted ACS rent as in the Inflation Adjustment described in Section A.
Although the data available to HUD would allow it to produce local inflation factors for a large majority of the country by population, not every area is represented individually in the private rent data. In FY 2023, HUD continued its practice of applying a Census Region based CPI rent inflation factor to these areas. For FY 2024, HUD proposes to use a rental unit weighted average of the private inflation factors for these areas, rather than the CPI rent inflation for the region. . . .
HUD is not proposing any additional changes to the FMR calculation, meaning it would still use the 5-year ACS data to establish the base rent, and use forecasts of gross rent CPI as the trend factor. Similarly, the “bedroom ratio” methodology used to produce FMRs for unit sizes other than two bedrooms would remain unchanged.
HUD is requesting public comment on the proposed changes to the FMR calculation methodology. HUD invites general comments on the appropriateness of changing the definition of recent movers as described above as well as the continued use of private rent data in calculating rent inflation factors. Additionally, HUD invites comments on the following questions:
-- Should HUD continue to use overall rent CPI to control for possible selection bias in the private rent inflation data by scaling the local private rent inflation factors, using for example a national statistic like BLS's New Tenant Repeat Rent index currently under development so that the rental-unit weighted average inflation factor would match the national statistic?
-- Should HUD adopt additional criteria beyond having at least 3 sources of private rent inflation data, such as a minimum population or rental unit count, to minimize undue volatility in year-to-year changes in private rent inflation factors? Should HUD consider altering the criteria of having at least 3 sources of private rent inflation data?
-- For the inflation adjustment (step 3), HUD proposes calculating Census Region-wide rental unit weighted average private inflation factors for areas without a local private factor. Is this the appropriate level of geography, or should HUD consider other weighting procedures such as a nearest neighbor approach?
FRN:
https://www.federalregister.gov/d/2023-13395