HUD Aims to Revise How It Calculates Income Limits

Income limit increases to be capped at 10 percent.

On Jan. 10, HUD published a notice on changes the agency is intending to implement to the methodology used for calculating Section 8 income limits. HUD publishes these income limits each year based on changes to each housing area’s median income. In calculating the income limits for each housing area, HUD relies on census data, subject to various rules and adjustments. We’ll take a closer look at the changes HUD is making to the income limit calculations.

Income Limit Basics

HUD issues updated area median family income estimates and Section 8 income limits annually. Since Fiscal Year 2010, HUD has limited the amount that the income limit for an area could increase or decrease. Prior to FY 2010, income limits could not decrease at all and there was no limitation on annual increases. Under the current methodology, HUD doesn’t allow income limits to decrease by more than 5 percent from the prior year’s level and doesn’t allow income limits to increase by more than the higher of 5 percent or twice the change in the national median family income.

From 2010, HUD added annual American Community Survey (ACS) data with an inflation adjustment to the formula in calculating national median income. However, in 2022, HUD changed the methodology and used only the ACS national median income change from three years earlier, without the inflation adjustment. This change was due to the COVID-19 pandemic, and the highest rate of inflation in a generation. At the time, if HUD had used the traditional formula for caps, the cap would’ve been much higher than the prior year’s cap. Instead, HUD varied the formula for the first time in 12 years and set it at 11.89 percent.

HUD’s Changes to Methodology

HUD’s notice makes two modifications to income limit calculations. The notice says that it will set a ceiling of 10 percent on increases year-to-year. The notice also clarifies the national median income portion of the cap. These changes are intended to more accurately align the adjustments with real income growth trends and control escalating rents in low-income housing areas.

National median income. National median Income is a key factor in setting income limits. In the notice, HUD stated that going forward, when calculating the HUD national median income component of the cap, it will use the most recent unadjusted estimates of median family income provided by the Census Bureau via the ACS data.

So, for FY 2024 income limits, the cap would be based on the change in national median family income from ACS 2021 to ACS 2022. HUD says it will continue to remove inflation adjustments from its cap calculation to keep in line with its purpose of capturing trends in median family income data rather than volatility introduced by accelerating or decelerating inflation. According to industry estimates, this means the cap based on ACS would be nearly 14.8 percent. But this figure will be limited by the ceiling or cap imposed by the other change implemented by the notice.

Absolute 10 percent cap. For the first time, HUD is implementing an absolute 10 percent cap in income limit increases, making the calculation of the annual cap very predictable. In other words, increases in income limits for any given area won’t be allowed to exceed 10 percent.

In other words, in years where data shows area incomes grew more than 10 percent, this absolute 10 percent cap will benefit existing households by offering some peace of mind. The household knows that their rents won’t increase by more than 10 percent in any given year. However, the cap could limit the available pool of prospective tenants near the top of the income qualifying limit since the income limits will be lower than actual change in the area’s median income.

HUD Seeks Comment on Changes

For owners, the revised Section 8 limits are important. The new cap means recalibrating income eligibility assessments and rent calculations for tenants. This could lead to more stable rent adjustments, offering predictability, but it might also necessitate reevaluating financial strategies to remain compliant and efficient under these new regulations. Having smaller allowable rent increases can compel owners to recalculate budgets, affecting site operations.

HUD will release the 2024 income limits on or around April 1. In the meantime, HUD has sought comments on the changes. The agency primarily seeks to address key questions regarding the effectiveness and impact of the proposed 10 percent cap on annual income limit increases, the accuracy of the national median family income definition, and the overall implications for low-income housing markets. The comment period closed Feb. 8, so future guidance may address those issues.