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Transportation Costs Can Wipe Out Housing Savings

June 11, 2014

For many years, families with lower incomes have moved farther from city centers to find affordable housing. But the recent spike in gas prices has brought national attention to the cost of transportation to and from these distant neighborhoods. Studies have shown that for some families, transportation costs can even exceed housing costs. New indices aim to elucidate the tradeoffs between these two sets of costs and help families find truly affordable places to live.

In the housing market, distance matters. As the odometer turns, house payments fall. That makes homes farther from city centers less expensive, but does it make them more affordable?
The raw cost of housing is not the only factor to consider when making a purchase. The farther one has to travel between home and work, the smaller the advantage of inexpensive housing. Recent studies have made it apparent that transportation is almost as large a factor as housing in calculating an area’s true cost.

Two Studies

“Beltway Burden,” a 2009 study of metropolitan Washington, D.C., uses Clarke County, VA as a startling example of the perils of ignoring transportation costs. Housing costs in Clarke County average $19,939 a year, considerably less than the average of $22,960 for the metropolitan area as a whole. Transportation costs for those living in Clarke County, however, average $17,090 a year, versus $13,234 for the metropolitan area. This disparity makes the combined cost of living in Clarke County higher than the metro average: $37,029 rather than $36,194.

That doesn’t seem like such a big difference, until incomes are factored in. According to the study, the average D.C.-area household earns $78,221 a year, spending nearly 30 percent on housing and 17 percent on transportation. The average Clarke County household earns $64,288 a year, spending about the same share of its budget on housing (31 percent) but far more on transportation (26 percent). That means that despite Clarke County’s relatively affordable housing costs, the combined cost of housing and transportation in Clarke County consumes a far greater share of the average household’s budget (57 percent) than the metro area average (47 percent).

Similar findings emerged from a 2006 study by the Center for Housing Policy (CHP), the Center for Neighborhood Technology (CNT), and the Institute of Transportation at the University of California, Berkeley. That study, “A Heavy Load,” examined the budgets of households earning between $20,000 and $50,000 in 28 different metropolitan areas. When compared to households of all incomes, these families spent the same percentage on housing (27.7 percent) but far more on transportation (29.6 percent versus 20.2 percent). “A Heavy Load” concluded: “In their search for lower cost housing, working families often locate far from their place of work, dramatically increasing their transportation costs and commute times. Indeed, for many such families their transportation costs exceed their housing costs.”

Hidden Costs

Rising gas prices last year brought national attention to often unobtrusive transportation costs. Gloria Ohlman, the communications director at Reconnecting America, points out the reason transportation expenses are often overlooked: “Families pay for housing in monthly lump sums, either rent or mortgage, but they pay their transportation costs in bits and pieces. Who knows how much they spend on gas, repairs, insurance? It’s all these disaggregated costs. I don’t think people are very cognizant of how much they spend on transportation.”

The Housing and Transportation Affordability Index (online at http://htaindex.cnt.org/)--developed by the Center for Transit-Oriented Development (CTOD) and CNT on behalf of The Brookings Institution--illuminates the tradeoff between housing and transportation in 42 cities across the country. The index adds average housing costs and average transportation costs and divides the total by average income. (Transportation costs are calculated using a model that takes into account density, walkability, and transit availability of individual neighborhoods.)

The Housing and Transportation Affordability Index concludes a family should spend no more than 47 percent of its income on housing and transportation. That figure is based on the national average expenditure of 19 percent for transportation plus the mortgage underwriting standard of 28 percent for housing. Using 47 percent as a benchmark, the index can tell families--and/or their REALTOR®--which neighborhoods are affordable based on a family’s particular income.

Another set of such indices is under development by the U.S. Department of Transportation (DOT) and the Department of Housing and Urban Development (HUD). In the spring of 2009 the secretaries of those agencies announced they will collaborate to expand affordable housing and transportation choices. High on their agenda: helping metro areas develop indexes that roll housing and transportation costs into a single measure of affordability.

“This idea had no traction for a long time, and suddenly the Obama administration seems to be seeing the importance,” Ohlman says. “I think this is the first time DOT and HUD have partnered on a project in something like 40 years.”

Bringing Costs Down

People choose where to live based on more than simply cost of housing and length of commute, so for some, other factors are the ones that tip the scales. “It’s a more complicated issue than just how much you’re paying,” says Jeffrey Lubell, executive director of CHP. “People also move because they want a bigger house, a safer neighborhood, better schools.”

Fortunately, transportation cost is not purely correlated to distance from city centers. Mass transit can mitigate the otherwise steep price of a daily commute, and a healthy awareness of the cost of distance may be more valuable to the home-buying process than any binary imperative. As Lubell says, “Ultimately, it’s about creating more walkable and transit-oriented communities where more of the things people need to do are closer together.”