the methods used for the BLS Family Budgets Program; and
hedonic regression methods, which attempt to isolate the contribution of individual characteristics of the housing unit to its price (geographic location is included as an independent variable of the regression in order to capture the effect of location controlling for all other characteristics of the unit).
For the administration of rental housing subsidies, HUD has developed a set of fair market rents, which vary by geographic location. Fair market rents are estimated annually for 2,416 counties that are outside metropolitan areas and all 341 U.S. metropolitan areas (Office of Policy Development and Research, 1992a).
Fair market rents are defined to equal gross rent (including utilities) at the 45th percentile of the rent distribution of standard quality rental housing units. HUD uses one of three data sources to make "base-year" estimates: (1) the American Housing Survey (AHS) provides estimates for 44 of the largest metropolitan areas, which include one-half of the nation's rental housing stock; (2) the decennial census; and (3) local random digit dialing telephone surveys. The base-year estimates are updated by using the shelter component of the local area CPI, where available, or estimates of price changes developed by the telephone surveys for HUD regions.
For fair market rents derived from AHS data, the sample for estimating the 45th percentile value for each bedroom size category consists of units occupied by recent movers, excluding public housing units, newly built units, noncash rental units, and units that lack certain characteristics indicative of housing quality. For rents derived from decennial census data, the sample for estimating the 45th percentile value is somewhat more heterogeneous because it is not possible to exclude public housing units, and there is less information with which to determine housing quality.
In 1989, the index values for HUD fair market rents for two-bedroom standard rental units relative to a U.S. average value of 1.00 ranged from 1.73 in San Francisco to 0.58 in nonmetropolitan areas of the Midwest. As expected, areas in the Northeast and the West had higher average rents than areas in the Midwest and the South. Areas in the Northeast and West also had higher rents relative to area median income than areas in the Midwest and the South (Kathryn Nelson, private communication).
There are some problems with the HUD fair market rents. First, they do not fully adjust for interarea differences in the quality of housing. Although all housing units sampled are said to be of "standard" quality, there may be a large variation within that category. Second, they are based on only one-third of the housing stock since only recent movers are surveyed. Rents for the other two-thirds may be lower as a result of a discount for long-term renters.