What Is Area Median Income (AMI)?
AMI is the midpoint of income distribution in a given area, with half of households earning more and half earning less. HUD calculates AMI annually for metropolitan statistical areas (MSAs), which typically encompass large urban areas as well as surrounding suburban counties. For New York City, this means that the AMI includes incomes from wealthier counties including Westchester and Nassau, which inflates the AMI figure. In 2023, the AMI for a family of four in the New York metro area was approximately $106,800—significantly higher than the actual median income for residents of many low-income neighborhoods in the city, such as Mott Haven or East New York.
This inflated AMI creates problems for affordable housing projects that rely on it to set rent levels (projects that receive government financing or participate in government programs that supply tax breaks or other benefits are required to utilize the AMI measure to determine eligibility). For example, if a project is required to provide affordable units to households earning 60% of AMI, the resulting rent is based on 60% of the inflated AMI, which could be unaffordable for residents of low-income neighborhoods. The outcome is that housing deemed “affordable” on paper is still too expensive for the people who need it most.
The Role of HUD’s Small Area Fair Market Rents (SAFMRs)
To address the shortcomings of the traditional AMI system, HUD introduced Small Area Fair Market Rents (SAFMRs). SAFMRs calculate fair market rents (FMRs) at the ZIP code level, rather than across an entire metropolitan area. Initially developed to improve the efficacy of the Section 8 Housing Choice Voucher program, SAFMRs provide a more localized measure of rent affordability, taking into account variations in rent prices across different neighborhoods within the same metropolitan area.
The SAFMR system was designed to ensure that voucher holders could access housing in higher-opportunity neighborhoods where rents are higher, without being constrained by metropolitan-wide rent limits. By calculating FMRs based on smaller geographic areas, SAFMRs more accurately reflect the cost of living in different parts of a city, providing a more nuanced approach to rent subsidies.
Using SAFMR Instead of AMI
SAFMR could be utilized in lieu of AMI to allow for a standard that better reflects the incomes of residents in specific neighborhoods, rather than using a broad metropolitan area. By using neighborhood-level data to determine eligibility, cities could tailor affordable housing projects to meet the needs of low-income residents more effectively. For instance, using SAFMR in New York City would result in lower income and therefore affordable rents in neighborhoods with higher poverty rates, ensuring that affordable housing developments in those areas serve local residents.
This more localized calculation would also help address the geographic mismatch between where affordable housing is built and where it is most needed. In many cases, affordable housing projects are concentrated in lower-income neighborhoods, but the rents are set based on the inflated regional AMI, making them unaffordable for local residents. Use of SAFMR would ensure that housing developed in the Bronx or East New York is priced appropriately for the incomes of those communities, rather than for wealthier suburban areas.
The city could also bundle SAFMR measures to create areas that are larger than single ZIP codes but still far more targeted than the entire metropolitan region for determining eligibility. For instance, 41 building in NYC have their own ZIP code, which illustrates that setting affordable rents at such a minute scale may be overkill. One could easily imagine this resulting in developments strategically located on one side of a street that happens to be across a ZIP code division with a substantially wealthier ZIP on one side and a substantially poorer ZIP on the other; this change could also results in substantial fluctuations in land values seemingly overnight which would no doubt incur substantial pushback from developer interests. The exact scale of geography that is most suited to a revised affordability measurement is still very open for debate, but it is clear that measurement at the metropolitan region is not the appropriate answer.
Benefits and Challenges of More Targeted Affordability Measures
A more granular approach to AMI has several potential benefits:
Increased Affordability: By basing AMI on local income data, affordable housing projects can set rents that are truly affordable for residents of low-income neighborhoods.
Equitable Distribution of Affordable Housing: Localizing AMI would ensure that housing resources are more equitably distributed, targeting areas with the greatest need rather than allowing high-income areas to dominate calculations.
Improved Housing Mobility: Just as SAFMR allows voucher holders to move to higher-opportunity neighborhoods, its use for other affordability programs could help ensure that affordable housing is built in a wider variety of neighborhoods, increasing economic diversity.
However, implementing a more localized income and rental measurements would also present challenges. One key concern is that developers might be discouraged from building affordable housing in lower-income areas if the resulting rents are too low to cover development costs. This could exacerbate housing shortages in these areas unless additional subsidies or incentives are provided.
