A Guide To Fair Market Rent
As a prospective Section 8 landlord or tenant, there’s much you must understand about this federal program before signing a contract or lease. Since Section 8 housing differs from public housing units and other housing assistance programs, it’s important to understand how it works in detail.
One important component of the program is Fair Market Rents, or FMRs.
Rents for Section 8 properties are set differently than in the private market, even though the program partners with private landlords. Rates for Section 8 properties are based on Fair Market Rent rates, which are established each year by the U.S. Department of Housing and Urban Development.
In this article, we’ll cover the basics of Fair Market Rents, including how they’re calculated and used in the Section 8 program for different metropolitan areas.
What is Fair Market Rent?
Fair Market Rent, or FMR, is a statistic used by the HUD and local affordable housing organizations to determine rent rates and housing assistance payment amounts for the different assistance programs, like the Housing Choice Voucher Program (Section 8). Put simply, FMR is a measure of what a fair rate (slightly below the median) would be for a rental property in a particular area.
Each area/zip code has a different FMR. These FMRs are updated each year by the HUD as market rates change to maintain accuracy.
How is Fair Market Rent Calculated?
How is Fair Market Rent determined?
As it is technically defined by the HUD, Fair Market Rent (FMR) is an “estimate of the amount of money that would cover gross rents (rent and utility expenses) on 40% of the rental housing units in an area.” In other words, FMR lies at about the 40th percentile measurement of the median rent for a property with certain characteristics (square footage, number of bedrooms, etc.) in a specific local housing market. This means in one area fair market rents will differ than another area.
For example, the FMR for a 2-bedroom apartment in Cincinnati is $1,093. This means that $1,093 a month would be enough money to cover housing costs for approximately 40% of the city’s rental properties.
That’s how FMR works in theory. In reality, however, the HUD’s methodology for calculating a Fair Market Rent value is a bit more complex. In addition to the median income, the HUD accounts for inflation, rent forecasts, the state minimum, the number of bedrooms, and the previous year’s FMR. Here is a breakdown of the actual methodology used by the HUD to calculate FMRs:
- Base Rent is Calculated – Base rents are taken from local survey data. Specifically, they are taken from the American Community Survey (ACS) for 2-bedroom adjusted standard quality gross rents in each FMR area. The HUD only uses estimates that are “statistically reliable,” or that have at least 100 survey cases and margins of error less than 50% of the estimate itself. If the estimate isn’t statistically reliable, the HUD takes two minimally reliable estimates from the past three years, adjusts them for inflation, and uses their average.
- Adjustments Are Made for Recent Mover Factor – The base rent value is adjusted based on gross rents data, specifically a ratio of the estimate of gross rent paid by recent movers to the estimate of rent from all renters in an area.
- Adjustments are Made for Inflation– The HUD finds the regional or local change in gross rent inflation using a weighted average of various data from private sources and the Consumer Price Index (CPI).
- Trend Factor is Accounted For – Rents are further inflated based on a “trend factor,” which is the forecast of CPI gross rent changes through the coming year.
- All Factors are Multiplied – The base rent is multiplied by the recent mover factor, the gross rent inflation factor, and the trend factor.
- State Minimum is Considered – The preliminary FMR is raised to meet the State minimum if it falls below it.
- Bedroom Ratios are Calculated – The HUD calculates “bedroom ratios” and multiplies them by the two-bedroom rates to produce rates for units with various numbers of bedrooms.
- FMR is Compared to Previous Year’s – The 2023 FMRs are not allowed to be less than 90% of the 2022 FMRs. If they are, the HUD applies a “floor” based on the previous year’s rates.
How is FMR Used in the Section 8 Program?
FMRs represent the cost to rent a moderately-priced rental unit in a particular area. For this reason, it is used as a baseline when a public housing agency (PHA) and a private landlord begin rent negotiations.
When a Section 8 tenant applies to live at a property, the PHA and the landlord will negotiate the final rent rate between them. The landlord will want to charge as high or as close to market rent as possible, but the PHA will want to charge as close to the FMR as possible. The final rate decided on for a Section 8 tenant could be higher or lower than the FMR, but the FMR is the baseline that the public housing authority begins with.
Once a rent rate is finalized, the PHA will start issuing housing vouchers directly to the landlord. These vouchers cover approximately 70% of the finalized rent rate each month. The tenant is responsible for paying the remaining 30%.
Where Can I Find the Fair Market Rent for My Area?
Wondering what the FMR is for your zip code? Luckily, the HUD has a useful online tool for viewing FMRs. You’ll need to enter your state and county, and then you’ll be able to view FMRs in your location for the current year based on number of bedrooms.
Sometimes, the local public housing agencies operating in an area use a more granular approach and calculate Small Area Fair Market Rates (SAFMRs). SAFMRs are FMRs specifically calculated for metropolitan zip codes. There’s an HUD tool for finding these, too. In certain locations, PHAs are required to use SAFMRs instead of FMRs as a baseline for Section 8 voucher amounts, so check your PHA’s website or get in touch with a housing official if you aren’t sure which number is used.
Conclusion
Fair Market Rent is one of many terms you’ll hear thrown around when talking about affordable housing and Section 8. The HUD strives to make FMR an accurate representation of the actual cost of housing across the U.S. However, as you well know, there is no magic number that works all the time for Section 8 tenants or typical ones. That’s why landlords get a say in the final rent rate to ensure both landlords and tenants involved in this program end up with a rate that meets their needs.
