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Source and Accuracy

Appendix A. Overview of the SIPP Program

Background

The Survey of Income and Program Participation (SIPP) provides a major expansion in the kind and amount of information available to analyze the economic situation of households and persons in the United States. The information supplied by this survey is expected to provide a better understanding of the level, and changes in the level, of well-being of the population and of how economic situations are related to the demographic and social characteristics of individuals. The data collected in SIPP will be especially useful in studying Federal transfer programs, estimating program cost and effectiveness, and assessing the effect of proposed changes in program regulations and benefit levels. Analysis of other important national issues such as tax reform, Social Security program costs, and national health insurance can be expanded and refined, based on the information from this new survey.

The first interviews in the SIPP took place in October 1983, nearly 8 years after the research and developmental phase, the Income Survey Development Program (ISDP), was initiated by the Department of Health, Education, and Welfare, in 1975. Between 1975 and 1980 extensive research was undertaken to design and test new procedures for collecting income and related socioeconomic data on a subannual basis in a longitudinal framework. Much of the work centered around four experimental field tests that were conducted in collaboration with the Bureau of the Census to examine different concepts, procedures, questionnaires, and recall periods. Two of the tests were restricted to a small number of geographic sites; the other two were nationwide. In the first nationwide test, the 1978 Research Panel, approximately 2,000 households were interviewed. Because of the relatively small number of interviews, controlled experimental comparisons of alternatives were not possible; however, the panel did demonstrate that many new ideas and methods were feasible. It also laid a foundation for the largest and most complex test: the 1979 Research Panel. This panel consisted of a nationally representative sample of 8,200 households and provided a vehicle for feasibility tests and controlled experiments of alternative design features.

In the fall of 1981, virtually all funding for ISDP research and planning of the continuing SIPP program was deleted from the budget of the Social Security Administration. The loss of funding for fiscal year 1982 brought all work on the survey to a halt. In fiscal year 1983, however, money for initiation of the survey was allotted in the budget of the Bureau of the Census. Work began almost immediately in preparation for the survey start in October 1983. The design of the questionnaire for the first interview was similar in structure to that used in the 1979 ISDP panel study with two important exceptions. First, the reference period for the questions was extended from 3 months to 4 months in order to reduce the number of interviews and, therefore, lower costs. Second, the questions covering labor force activity were expanded in order to provide estimates that were closer, on a conceptual basis, to those derived from the Current Population Survey (CPS). The design also incorporated a number of other modifications resulting from experience with the 1979 pilot study.

Survey Content

There are three basic elements contained in the overall design of the survey content. The first is a control card that serves several important functions. The control card is used to record basic social and demographic characteristics for each person in the household at the time of the initial interview. Because households are interviewed a total of eight or nine times, the card is also used to record changes in characteristics such as age, educational attainment, and marital status, and to record the dates when persons enter or leave the household. Finally, during each interview, information on each source of income received and the name of each job or business is transcribed to the card so that this information can be used in the updating process in subsequent interviews.

The second major element of the survey content is the core portion of the questionnaire. The core questions are repeated at each interview and cover labor force activity, the types and amounts of income received during the four-month reference period, and participation status in various programs. Some of the important elements of labor force activity are recorded separately for each week of the period. Income recipiency and amounts are recorded on a monthly basis with the exception of amounts of property income (interest, dividends, rent, etc.). Data for these types of income are recorded as totals for the four-month period. The core also contains questions covering attendance in postsecondary schools, private health insurance coverage, public or subsidized rental housing, low-income energy assistance, and school breakfast and lunch participation.

The third major element is the various supplements or topical modules that will be included during selected household visits. The topical modules cover areas that need not be examined every four months. Certain of these topical modules are considered to be so important that they are viewed as an integral part of the overall survey. Other topical modules have more specific and more limited purposes. A list of topical modules includes work history, health characteristics (including disability), assets and liabilities, pension plan coverage, housing characteristics, child care, child support agreements, support for nonhousehold members, program participation history, reasons for not working, calendar year income and benefits, taxes, and education and training.

Sample Design

The sample design for the first SIPP panel in 1984 consisted of about 20,000 households selected to represent the noninstitutional population of the United States (See appendix F for more details on the procedures used to select the sample). The subsequent 1987 and 1990 panels had sample sizes of approximately 12,000 and 20,000 households, respectively. The 1991 and 1992 panels had sample sizes of 15,000 and approximately 20,000, respectively, and were combined for purposes of analysis in a report in this series. The 1993 panel had a sample size of 20,000, and was used for this report, although the data were collected in February through May of 1995. Households in each SIPP panel are scheduled to be interviewed at four-month intervals over a period of 2 1/2 years. Tables A-1 and A-2 show the sample design for the 1992 and 1993 panels. The reference period for the questions is the four-month period preceding the interview. For example, households interviewed in February 1995 were asked questions for the months October, November, December 1994, and January 1995. This household was interviewed again in June 1995 for the February through May period. The sample households within a given panel are divided into four samples of nearly equal size. These subsamples are called rotation groups and one rotation is interviewed each month. In general, one cycle of four interviews covering the entire sample using the same questionnaire is called a wave. Therefore, wealth data were collected in the same wave for all households. This design was chosen because it provides a steady work load for data collection and processing.

SIPP panels have been introduced in February of each year succeeding the 1984 panel. This overlapping design provides a larger sample size from which cross-sectional estimates can be made. The overlap also enhances the survey's ability to measure change by lowering the standard errors on differences between estimates for two points in time.

Survey Operations

Data collection operations are managed through the Census Bureau's 12 permanent regional offices. A staff of interviewers assigned to SIPP conducts interviews by personal visit each month with most interviewing completed during the first 2 weeks of that month. Completed questionnaires are transmitted to the regional offices where they undergo an extensive clerical edit before being entered into the Bureau's SIPP data processing system. Upon entering this processing system, the data are subjected to a detailed computer edit. Errors identified in this phase are corrected and computer processing continues.

Two of the major steps of computer processing are the assignment of weights to each sample person and imputation for missing survey responses. The weighting procedures assure that SIPP estimates of the number of persons agree with independent estimates of the population within specified age, race, and sex categories. The procedures also assure close correspondence with monthly CPS estimates of households. In almost all cases, a survey nonresponse is assigned a value in the imputation phase of processing. The imputation for missing responses is based on procedures generally referred to as the "hot deck" approach. This approach assigns values for nonresponses from sample persons who did provide responses and who have characteristics similar to those of the nonrespondents.

The longitudinal design of SIPP dictates that all persons 15 years old and over present as household members at the time of the first interview be part of the survey throughout the entire 2 1/2 year period. To meet this goal, the survey collects information useful in locating persons who move. In addition, field procedures were established that allow for the transfer of sample cases between regional offices. Persons moving within a 100-mile radius of an original sampling area (a county or group of counties) are followed and continue with the normal personal interviews at 4-month intervals. Those moving to a new residence that falls outside the 100-mile radius of any SIPP sampling area are interviewed by telephone. The geographic areas defined by these rules contain more than 95 percent of the U.S. population.

Because most types of analysis using SIPP data will be dependent not on data for individuals but on groups of individuals (households, families, etc.) provisions were made to interview all "new" persons living with original sample persons (those interviewed in the first wave). These new sample persons entering the survey through contact with original sample persons are considered as part of the sample only while residing with the original sample person.

Appendix B. Definitions and Explanations

Coverage. The estimates in this report are for total families and unrelated individuals in 1995. In addition, historical data are presented for 1984, 1988, 1991 and 1993. The estimates are based on data gathered in the following Surveys of Income and Program Participation (SIPP): the 1984 SIPP Panel, Wave 4; the 1987 SIPP Panel, Wave 4; the 1990 SIPP Panel, Wave 4; and the 1991 Panel, Wave 7 and 1992 Panel, Wave 4. Interviewing for wave 4 (1984) was in September through December 1984; wave 4 (1987) was in February through May of 1988; for wave 4 (1990) it was February through May of 1991; and for the combination of wave 7 (1991) and wave 4 (1992) it was February through May of 1993. For wave 7 (1993) it was February through May of 1995.

Family. The term "family" refers to a group of two or more persons related by birth, marriage, or adoption who reside together. Every family must include a householder. A household may contain a primary family and one or more subfamilies.

Subfamily. A subfamily is a married couple with or without children, or one parent with one or more own single children under 18 years old living in a household but not including among its members the person or couple maintaining the household. There are two kinds of subfamilies, related and unrelated.

Related subfamily. A related subfamily is a subfamily whose members are related to the person or couple maintaining the household. The most common example of a related subfamily is a young married couple sharing the home of the husband's or wife's parents.

Unrelated subfamily. An unrelated subfamily is a subfamily whose members are not related to the person or couple maintaining the household. Members of unrelated subfamilies may include such persons as guests, lodgers, or resident employees and their relatives living in a household.

Count of families. In this report the count of total families is the number of primary families, plus related subfamilies, plus unrelated subfamilies. The breakdown by each group is:

                                  1984         1988           1993          1995

 o Total families           65,708,000	 67,957,000     71,345,000    72,895,000

 o Primary families         62,839,000	 65,088,000     67,595,000    68,932,000

 o Related subfamilies       2,427,000	  2,415,000      2,918,000     3,077,000

 o Unrelated subfamilies       442,000	    454,000        832,000       886,000

Family status. Persons were classified as members of a married-couple family; a family with male householder, no wife present; a family with female householder, no husband present; or as unrelated individuals based on their most common status during the calendar year. For example, a person who was in a married- couple family for 7 months but was an unrelated individual for 5 months was classified as being in a married-couple family.

Unrelated individuals. The term "unrelated individuals" refers to persons 15 years old or older who are not living with any relatives. An unrelated individual may (1) constitute a one-person household, or (2) be part of a household including one or more other families or unrelated individuals. Thus, a widow living by herself or with one or more other persons not related to her, a lodger not related to the householder or to anyone else in the household, or a servant living in an employer's household with no relatives are examples of unrelated individuals. The affordability status of unrelated individuals is determined independently of other household members.

Age of householder. The age of the householder is based on the householder's age at their last birthday as of December 31, 1994.

Race. Families and unrelated individuals are divided into three groups based on the race of the householder: White, Black, and "other races". The last category includes Native Americans, Japanese, Chinese, and any other race except White and Black.

Hispanic origin. Families and unrelated individuals are classified as Hispanic origin based on a question that asked for self-identification of the householder's origin or descent. Persons of Hispanic origin may be of any race.

Tenure. A family or unrelated individual is considered to be a "current owner" if the unrelated individual or a member of the family is an owner or co-owner of the unit in which they live, even if the unit is mortgaged or not fully paid for. A family or unrelated individual is a "current renter" if the individual or a member of the family is one of the persons who rents the unit. Subfamilies (both related and unrelated) are given the same tenure status as the primary family with whom they live.

Income. The income amounts represent amounts actually received during the 4-month reference period, before deductions for income and payroll taxes, union dues, Part B Medicare premiums, etc.

The SIPP income definition includes three types of earnings: wages and salary, nonfarm self- employment, and farm self-employment. For this report, the data on income are limited to "available" money (pre-transfer) family income. For an explanation of this concept and the types of income included and excluded, see appendix C. The annualized income data in this report are based on the monthly amounts recorded for the 4-month reference period.

Value. Value is the respondent's estimate of how much the property (house and lot) would sell for if it were for sale. Any nonresidential portions of the property are excluded from the cost.

Criterion home. The criterion home is the value of the home used to determine the affordability status of each family and unrelated individual. In this report, several different criterion homes are used to measure homeownership affordability:

  • Median-priced home: This is the median value of new or existing owner-occupied (non-mobile home) units in each area based on value data collected in SIPP. Half of the homes in the area are below this value and half are above.
  • Modestly priced home: This is the value of new or existing owner-occupied (non-mobile home) units at the upper limit of the first quartile of the cases in the area, based on SIPP. Twenty-five percent of the homes in the area are below this value and 75 percent are above.
  • Low-priced home: This is the value of new or existing owner-occupied (non-mobile home) units at the 10th percentile of the cases in each area from SIPP. Ten percent of the homes in the area are below this value and 90 percent are above.
  • New single-family home: This is the median value of new single-family home sales in each census division for the second quarter of 1995, from the Census Bureau's Survey of Construction.
  • Price-adjusted home: This is the 1984 median value of new or existing owner-occupied (non- mobile home) units in each area from the 1984 SIPP, converted to 1995 constant dollars. This adjustment was made in order to discount for changes in consumer prices, and was based on changes in the average annual Consumer Price Index (CPI-U-X1).
  • Condominium home: This is the median value of an owner-occupied condominium unit in each census region from the Census Bureau's American Housing Survey in 1995.
  • Mobile homes have been excluded from the definition of each of the criterion homes because they are usually not financed in the same manner as other owner-occupied housing and often involve additional costs for mobile home park fees. However, in some areas of the country, where they are a significant portion of the housing inventory, they provide relatively low- cost housing for some families and individuals to move into homeownership.

For a description of the actual values of each criterion home by geographic area, see appendix E.

Median. The median represents the middle value in a distribution. The median divides the total frequency into two equal parts: one-half of the cases fall below the median and one- half of the cases exceed the median.

Geography. Data are presented in this report for the United States, the four census regions, the nine census divisions, and by whether families and individuals live in central cities of metropolitan areas, in the suburbs of metropolitan areas, or outside metropolitan areas.

  • Northeast Region New England Division: Connecticut, Maine, Massachusetts, New Hampshire, Rhode Island, and Vermont.
  • Middle Atlantic Division: New York, New Jersey, and Pennsylvania.
  • Midwest Region East North Central Division: Ohio, Indiana, Illinois, Michigan, and Wisconsin. West North Central Division: Minnesota, Iowa, Missouri, North Dakota, South Dakota, Nebraska, and Kansas.
  • South Region South Atlantic Division: Delaware, Maryland, District of Columbia, Virginia, North Carolina, South Carolina, Georgia, Florida, and West Virginia. East South Central Division: Kentucky, Tennessee, Alabama, and Mississippi. West South Central Division: Arkansas, Louisiana, Oklahoma, and Texas.
  • West Region Mountain Division: Montana, Idaho, Wyoming, Colorado, New Mexico, Arizona, Utah, and Nevada. Pacific Division: Washington, Oregon, California, Alaska, and Hawaii.

Appendix C. Methodology

Introduction

The purpose of this appendix is to explain the methodology used to measure homeownership affordability in this report. The approach taken is the same for each of the years for which data are presented (1984, 1988, 1991, 1993, and 1995). Although the basic methodology is the same, changes in interest rates, fees and charges, and Fannie Mae and Federal Housing Administration (FHA) regulations did occur between the survey years, and do affect the affordability calculations. These changes are noted below.

Criteria for Measuring Affordability

In this report, two primary approaches are used to provide a measure of homeownership affordability:

  1. 1. For each family and unrelated individual, a calculation is made using data on income, assets, and debt to determine the maximum-priced home the family or individual can afford.
  2. 2. For each family and unrelated individual, calculations are made using data on income, assets, and debt to determine if the family or individual can afford to purchase the criterion home in the area where it lives. Several criterion homes are used to measure affordability - a median-priced home, a modestly priced home, a low-priced home, a new single-family home, a price-adjusted home, and a condominium. For an explanation of these terms, see appendix B. For the values of each of these criterion homes, see appendix E.

Determining affordability status for families and individuals within the area where they live discounts the possibility that home purchasers may choose to live outside of their current residential area for more affordable housing or that some purchasers may have to move to less affordable areas than where they currently live due to job transfers or other reasons.

Primary Variables Used in Affordability Calculations

The following key variables are used to calculate homeownership affordability:

  • Mortgage type. Affordability calculations are made using two types of mortgage loans: (1) conventional fixed rate 30-year loans; and (2) Federal Housing Administration (FHA)-insured 30-year loans.
  • Interest rates. For conventional fixed rate 30-year loans the interest rate used is the average contract interest rate on conventional loans closed during the survey period, determined from the Federal Housing Finance Board's (FHFB) Monthly Interest Rate Survey (MIRS). The rate for these loans was estimated at 8.67 percent in 1995, 7.17 percent in 1993, 9.51 percent in 1991, 9.79 percent in 1988, and 12.91 percent in 1984.

For FHA-insured loans, the rate was determined based on information from the Department of Housing and Urban Development's (HUD) report on Average Prices for FHA-Insured Home Mortgages (Section 203), during the survey period. This assessment estimated that FHA-insured loans were 8.79 percent in 1995, 7.55 percent in 1993, 9.50 percent in 1991, 9.67 percent in 1988, and 13.00 percent in 1984.

Criterion home. The criterion home is the value of the home used to determine affordability status. Six different criterion homes are used in the calculations. See appendix B for a definition of each criterion home, and appendix E for the actual value of each home.

Income. "Available" money family income is used in all the affordability calculations. It is the income of the husband and wife only in a married-couple family, and the male or female only in a family with a male or female householder. The income data were collected during the 4-month reference period for each survey and converted to an annual amount by multiplying by 3.

"Available" money family income includes income from:

  • Wages, salaries, tips, bonuses, etc.
  • Own business, farm, etc. after expenses
  • Social Security payments
  • U.S. Government Railroad Retirement pay
  • Veterans compensation or pensions
  • Black lung payments
  • Payments from a purchased sickness, accident, or disability
  • Child support or alimony payments
  • Pension payments from a company or union
  • Federal Civil Service or other Federal civilian employee
  • U.S. military, National Guard, or Reserve Forces retiree
  • State or local government pensions
  • Paid-up life insurance policies or annuities
  • Estates or trusts
  • Other payments for retirement, disability, or survivor
  • National Guard or Reserve pay
  • Mortgages
  • Royalties
  • Other permanent cash income not included elsewhere

"Available" money family income excludes temporary and noncash government transfers from:

  • Federal or State Supplemental Security Income (SSI)
  • State Unemployment Compensation
  • Supplemental Unemployment Benefits
  • Other unemployment compensation
  • Worker's compensation
  • State, employer, or union temporary sickness or disability
  • Aid to Families with Dependent Children (AFDC)
  • General assistance or General relief
  • Indian, Cuban, or Refugee Assistance
  • Foster child care payments
  • Women, Infants, and Children Nutrition Program
  • Food stamps
  • Other welfare
  • G.I. Bill and other VA educational assistance
  • Relatives or friends
  • Lump sum payments
  • Roomers or boarders
  • A charitable group
  • Incidental or casual earnings

Also excluded is income from rental property and income from interest or dividends from regular passbook savings accounts in a bank, savings and loan, or credit union; money market deposit accounts; certificates of deposit or other savings certificates; interest- earning checking accounts; money market funds; U.S. government securities; municipal or corporate bonds; stocks or mutual funds; and other interest-earning assets. Income from these sources is not included because the assets generating this income can be sold to provide cash to increase the initial downpayment to purchase the home.

Real estate taxes. Real estate taxes are estimated for each region based on data from the American Housing Survey (AHS). The following were used for each region for each year:

Tax Per $1,000 Value



                 1995           1993              1991        1988        1984         

Northeast    	  $18		 $17		   $13         $13         $16  

Midwest       	  $14		 $15		   $14         $14         $14  	   

South        	  $ 9		 $ 9		   $ 8         $ 7         $ 7        

West         	  $ 9		 $ 8		   $ 8         $ 8         $ 7

Property insurance. Property insurance is estimated at $3 per $1,000 value for homes in all areas in each year based on guidelines set forth in the "Guide to Residential Financing".

Closing costs. Closing costs include costs for transfer taxes, title fees, and appraisal fees; and prepayment items such as real estate taxes and property insurance. Although they can vary from area to area, for conventional loans in this report they are estimated to be 3 percent of the total value of the property based on guidelines in the "Guide to Residential Financing". For conventional fixed rate mortgages these fees must be paid "up- front" and they cannot be financed. For FHA-insured loans, the administrative part of the closing costs (transfer taxes, title fees, etc.), as well as the loan origination fee can be financed (based on Department of Housing and Urban Development studies, the administrative closing costs are estimated to be 1.2 percent of the purchase price of the home).

Fees and charges. Fees and charges include all fees, commissions, discounts, and "points" paid by the borrower or seller in order to obtain a loan. They exclude charges for mortgage credit, life or property insurance, transfer taxes, and title fees. Fees and charges were estimated for conventional loans based on data for conventional loans closed during the survey period, determined from the Federal Housing Finance Board's Monthly Interest Rate Survey (MIRS). This estimate produced fees and charges of 1.15 percent of the mortgage amount in 1995, 1.30 percent in 1993, 1.62 percent in 1991, 1.98 percent in 1988, and 2.58 percent in 1984. For FHA-insured loans, fees and charges were estimated from HUD's eport on Average Prices for FHA-Insured Home Mortgages (Section 203). They were estimated at 1.47 percent of the mortgage amount in 1995, 1.59 percent in 1993, 1.63 percent in 1991, 2.00 in 1988, and 2.90 in 1984. For FHA-insured loans, the discount part of the fees and charges must be paid "up-front". The remaining part - the loan origination fee - can be financed.

Down payment. The down payment is the cash portion of the price of the house that the buyer must pay from his/her own funds. The minimum down payment needed for conventional loans is 5 percent of the purchase price of the home and the amount cannot be financed.

For FHA-insured loans, the administrative part of the closing costs and the loan origination fee are added to the purchase price of the home to derive "total acquisition costs". The homebuyer is required to pay 3 percent of the first $25,000 of the total acquisition costs and 5 percent of the amount over $25,000.

Assets. Assets include all cash available in savings accounts, money market deposit accounts, certificate of deposits, money market funds, government securities, bonds, checking accounts and the net value of stock and mutual funds. The net value of stock is the gross asset value of the stock portfolio minus the amount borrowed on stocks in a margin account.

Assets also include the net equity available, after selling costs and discounts are subtracted, in rental income property owned, non-rental income property owned, debt owed from businesses owned, and mortgages owned; as well as the equity available in any currently owned home. The following discounts were applied:

  • Equity in owned home and from sale of rental income property (10 percent) - Typical selling costs include brokerage fees of 7 percent and fix-up and transfer costs of 3 percent.
  • Non-rental income property (15 percent) - This includes property such as vacation homes and undeveloped lots. Typical selling costs include brokerage fees of 10 percent and fix-up and transfer costs of 5 percent.
  • Owned mortgages and debt from the sale of owned businesses (25 percent) - Both of these are debt instruments that are not very liquid. Typically they are sold to investors who require high rates of return on their investments.

Debts. Debt is the amount owed on credit cards, automobile loans, bank loans, outstanding home mortgages, and all other loans.

Total allowable debt. Under Fannie Mae guidelines for a conventional loan, total allowable debt for a family or unrelated individual is 8 percent of "available" monthly family income for consumer debt and 28 percent for mortgage debt. For an FHA-insured loan the total allowable debt is 41 percent for consumer and mortgage debt, with a maximum of 29 percent allowed for mortgage debt.

Total monthly payment on outstanding debts. Monthly debt payments are estimated at 3 percent of total outstanding debt (2 percent principal, 1 percent interest). Although interest rates may vary significantly for different types of debts, e.g. less for car loans and more for credit card debts, the 3 percent payment is considered an average payment typical of those required by consumers on a monthly basis.

Excess debt. A family or unrelated individual has excess debt if the monthly payment on outstanding debts is greater than the total allowable debt. This excess debt must be paid down to the total allowable debt level using available cash in order to qualify for a mortgage.

Calculation to determine affordability level versus criterion home in area. There are two principal determinants of whether a family or unrelated individual can afford a criterion home: (1) does it have the necessary cash available to pay the minimum down payment, closing costs, excess debt, if any, and fees and charges associated with purchasing the home; and (2) after all available cash has been exhausted, does it have the necessary income needed to make the required monthly mortgage payments. If the answer to either question is "no", then they cannot afford the criterion home.

Conventional loans. The following specific steps go into the calculation of homeownership affordability for each family or unrelated individual for conventional loans:

  1. Total "available" money family income, assets (transformed into available cash), debt level, and excess debt, if any, are determined.
  2. If there is excess consumer debt (over 8 percent of "available" monthly family income), the excess debt is paid down using available cash. If the available cash is not enough to pay the excess debt down to an acceptable level, the family or unrelated individual is not able to afford the criterion home.
  3. The total amount needed for the minimum down payment, closing costs, fees and charges (including points) on the criterion home is determined. This amount is compared to the total remaining available cash (after any excess debt was paid down). If the available cash is not equal to or greater than the amount required, the family or unrelated individual is not able to afford the criterion home.
  4. Any available cash still remaining is added to the minimum down payment to reduce the amount of the criterion home that has to be financed.
  5. The mortgage needed to purchase the criterion home after all available cash is applied to the down payment is determined. The total mortgage needed is transformed into monthly payments of principal and interest based on the average interest rate for a conventional, 30-year, fixed payment mortgage.
  6. Monthly payments for real estate taxes, property insurance, private mortgage insurance (if the down payment is less than 20 percent of the criterion home) are determined. These amounts plus the amount for principal and interest become the total monthly mortgage payment required.
  7. According to Fannie Mae guidelines, the maximum amount of income that can be allocated to mortgage payments is 28 percent. If the total monthly mortgage payment required exceeds 28 percent, then the family or unrelated individual is not able to afford the criterion home.

FHA-insured loans. The specific steps involved in the calculation of affordability for FHA-insured loans are identical to those for conventional loans except for the following:

  1. For FHA-insured loans, the excess debt that must be paid down is debt greater than 41 percent of "available" monthly family income for consumer and mortgage debt combined, with a maximum of 29 percent allocated to mortgage debt.
  2. The total amount needed for the minimum down payment, closing costs, fees and charges (including points) on the criterion home is determined. For FHA-insured loans, the homebuyer is required to pay "up-front" 3 percent of the first $25,000 of total acquisition costs (purchase price, plus the administrative part of the closing costs, plus the loan origination fee), and 5 percent of the amount over $25,000. In addition, the buyer is required to pay pre-paid items and any discount points. If the available cash is not equal to or greater than the amount required, the family or unrelated individual is not able to afford the criterion home using an FHA-insured loan. In 1984, the maximum allowable FHA-insured mortgage for high-cost areas was $90,000. In 1988 and 1991, it was $124,875, in 1993 it was $151,000, and in 1995, the maximum allowable FHA-insured mortgage for high-cost areas was $152,362. For the purposes of this report, the maximum allowable FHA-insured mortgage for high-cost areas was used for all areas. If the required mortgage for the criterion home was above this amount, the homebuyer would have to pay the difference between the required mortgage and the maximum allowable mortgage from available cash.
  3. The monthly payments of principal and interest are based on the interest rates for an FHA-insured, 30-year fixed payment mortgage for each of the survey periods. This rate was estimated to be 8.79 percent in 1995, 7.55 percent in 1993, 9.50 percent in 1991, 9.67 percent in 1988, and 13.00 percent in 1984.
  4. The total monthly mortgage payment includes payments for principal and interest, real estate taxes, property insurance, and FHA mortgage insurance premium (regardless of the amount of the down payment).
  5. For FHA-insured loans, the maximum amount of income that can be allocated to mortgage payments is 29 percent. There were several changes in the FHA regulations in 1991. In February 1991, FHA implemented a new maximum loan-to-value ratio of 97.75 percent for properties appraised at $50,000 or more, and a ratio of 98.75 percent for properties appraised at less than $50,000. This change was implemented in the analysis of affordability for 1991. In July 1991, FHA implemented two other changes in policy. They added an annual mortgage insurance premium of 50 basis points, and limited the amount of closing costs that could be financed to 57 percent of the total. Since these changes occurred after data were collected in 1991 (February to May), and since the approach used in this analysis was to use the underwriting policy in effect at the time the data were collected, these two changes are reflected in the analysis of affordability for 1993. The limitation of 57 perent of the total closing costs that could be financed was abolished prior to the Spring of 1995.

Calculation of the Maximum-Priced Home a Family or Unrelated Individual Can Afford

The maximum-priced home that a family or unrelated individual can afford was calculated using the following steps for both conventional and FHA-insured loans:

  1. Based on total "available" money family income and Fannie Mae and FHA guidelines, the maximum allowable mortgage for a family or unrelated individual is determined.
  2. Total available cash is added to the maximum allowable mortgage to establish the total funds available.
  3. Amounts for closing costs, fees and charges, minimum down payment, mortgage insurance premiums, property insurance, and real estate taxes are deducted from total funds available. The remaining amount is the potential maximum-priced house that the family or unrelated individual can afford.
  4. The amount of cash required to purchase the potential maximum-priced house is determined. For conventional loans, this amount includes a minimum down payment of 5 percent, closing costs, and fees and charges (for FHA-insured loans the cash required is 3 percent of the first $25,000 of total acquisition costs and 5 percent of the amount over $25,000, plus pre-paid items, plus any discount points).
  5. If the total available cash is less than the amount of cash required, the potential maximum priced house is lowered based on the available cash and the amount of cash required for the potential maximum-priced house, until the maximum priced house is determined. This lowered figure becomes the maximum priced house that the family or unrelated individual can afford.
  6. If the family or unrelated individual has no available cash they cannot afford any house, regardless of their income.

Appendix D. Data Quality

Two major determinants of the quality of data collected in household surveys are the magnitude of missing responses and the accuracy of the responses that are provided. This appendix provides information about the imputation process for nonresponse cases and provides a comparison of selected items with independent estimates.

Nonresponse in this discussion refers to missing responses to specific questions or "items" on the questionnaire. Noninterviews or complete failure to obtain cooperation from any household member have not been considered in this discussion of nonresponses. Adjustments to account for noninterview are made by proportionally increasing the survey weights of interviewed households. Missing responses to specific questions are assigned a value in the imputation phase of the data processing operation.

Nonresponse is an important factor in assessing the quality of survey data. Nonresponse occurs when respondents do not answer questions because of a lack of knowledge or a refusal to answer. Nonresponses are assigned values prior to producing estimates from the survey data. The procedure used to assign or impute most responses for missing data for SIPP are of a type commonly referred to as a "hot deck" imputation method. This process assigns values reported in the survey by respondents to nonrespondents. The respondent for whom the value is taken is termed the "donor". Values from donors are assigned by controlling for demographic and economic data available for both donors and nonrespondents. For example, for every asset and liability item, there was a common set of characteristics used in the imputation process. These included the age, race, sex, and years of schooling of the person, and total household income during the four month reference period. For other items, additional characteristics were used in the imputation process. For example, the imputation of the current market value of own home used the common set of characteristics listed above plus the original purchase price of the home.

A second important determinant of data quality is the accuracy of reported and imputed amounts. Response errors are the result of a variety of factors including random response error, misreporting or failure to report asset ownership, misreporting of asset and liability values, and misreporting of the sources of income and the full amount received. In general, household surveys have a tendency to underestimate the number of persons receiving income and the average amount received.

The extent of response error is measured by comparing survey estimates with independently derived estimates. A comparison of SIPP aggregate asset amounts in 1988 with estimates derived from the Flow of Funds data of the Federal Reserve Board (FRB) is shown in Table D-1. The Flow of Funds Balance Sheet data provides estimates as of the end of the year.
Table D-1 [TXT - 2.3K]

There are several conceptual and coverage differences between SIPP and FRB balance sheet data. First, the household sector in the FRB Balance Sheet includes nonprofit institutions and private trusts not covered in SIPP. In order to make the source more comparable, a rough estimate of the financial assets held by the nonprofit sector and personal trusts was obtained from the Federal Reserve Board. The second difference is that the SIPP universe consists of the noninstitutional resident population. Excluded are Armed Forces personnel living in military barracks, citizens residing abroad, and institutional persons such as correctional facility inmates and nursing home residents. The asset holdings of these groups is included in the FRB Balance Sheet estimates. A third limitation is that the household sector of the FRB Balance Sheet is estimated as a residual after allocations are made to all other sectors. As a result, allocation errors can lead to inaccuracies in the household sector estimates, especially in assets where the amount held by households comprise a small percentage of the total.

Finally Table D-2 shows a comparison of SIPP estimates of median value of own home with similar data from the 1990 Decennial Census. Interviewing for the census took place on April 1990.
Table D-2 [TXT - 1.1K]

Appendix E.

Table E-1 [TXT - 5.4K]


Source: U.S. Census Bureau | Housing Affordability |  Last Revised: 2012-09-07T13:32:11.386-04:00