Each year, the US Department of Housing and Urban Development (HUD) calculates the median family income for each county or multicounty metro area. This area median income (AMI) is then used to calculate income limits on program eligibility and, in some cases, affordable rents for a host of federal and local programs, including the largest affordable housing programs in the United States. In this brief, we detail how HUD calculates AMI and explain how HUD and other agencies and programs use AMI to set income limits that dictate who can access subsidized housing and how much they will pay in rent. We then describe annual changes in AMIs, break down the factors that produce changes in AMIs, and document the accuracy of AMI calculations in five large metropolitan areas. We find:

• When the inflation rate is higher than the rate of income growth in an area, HUD’s AMI calculation will be higher than the actual area median income; conversely, when incomes are increasing faster than inflation, HUD’s AMI calculation will be lower than the actual median income.
• Annual changes in AMI tend to be small, but higher inflation led AMIs to grow by an average of 11 percent in 2022.
• There is also considerable variation in AMI changes across the country every year. Even in years with a small increase or decrease in average AMI, some HMFAs saw their AMI rise by 5 percent or more. And even in 2022, when AMIs rose by 11 percent on average, about 2 percent of HMFAs saw a decrease in AMI.
• AMIs that are higher than actual median incomes affect housing assistance in two important ways: they expand the number of households eligible for assistance under a variety of housing programs and, because of the way LIHTC and other programs set affordable rents, lead to higher rents on units designated as affordable.

Based upon these findings, we make the following recommendations:

• Research is needed to explore methods of calculating AMIs that account for income growth rather than price growth.
• Programs that use HUD’s AMI to set eligibility thresholds or rents should explore building in safeguards to prevent sharp changes in rents (beyond those already implemented by HUD).
• Programs that use HUD’s AMI to set eligibility thresholds or rents—but are not statutorily required to do so—should evaluate whether they would better served making their own inflation adjustments.
• Congress should consider whether 30 percent of the targeted income limit is the right basis for affordable rents for federal programs, including in buildings financed with LIHTC.