As we all anticipate the release of 2014 Basic Allowance for Housing (BAH) rates, it seems to be exactly the right time to review how BAH is calculated.
If you don't understand, it certainly seems random: How can rates go down if your landlord is raising the rent? How can one rank have rates go up when another rank has rates go down? I'm going to try to explain this simply without making it a million pages long. There are two basic parts to the equation: how the cost information is collected, and how the collected information is used to determine the rates.
STEP ONE: Collecting the Cost Information
BAH rate calculations include three parts: rental housing costs, utility costs, and renters' insurance costs.
Rental Housing Costs
The Department of Defense hires a contractor to survey approximately 400 rental markets each year. The contractor is looking for average rents and utility costs for six different types of properties:
- one bedroom apartments,
- two bedroom apartment,
- two bedroom townhouse,
- three bedroom townhouse,
- three bedroom single family house, and
- four bedroom single family house.
Data is collected during the summer, when the housing market is most active. In order to make sure that it is collecting data that is representative of appropriate quality housing, the contractor looks at the average income in an area when selecting the housing to poll, and tries to select neighborhoods whose average income is roughly the same as comparable military members. The survey excludes any housing deemed substandard, including mobile homes, efficiency apartments, furnished rentals, income-restricted housing, seasonal housing, and age-restricted units.
In order to verify all of its rental cost data, the survey includes information about actual, available rental units, and also includes input from area real estate professionals, the installation housing office, and the installation leadership. Review by the housing referral office and the installation leadership helps to ensure that the data isn't including unsafe or inappropriate neighborhoods or units.
Once the rental cost information is collected and processed, there are on-site reviews of the information collected to ensure that it is accurate.
Information on utility costs is obtained by using:
- rates from the local utility provider,
- consumption information from the annual American Housing Survey (AHS) performed by the Bureau of the Census, and
- climactic information from the National Oceanographic and Atmospheric Administration (NOAA).
Armed with these three sets of data, the DOD considers the climate and average consumption, then applies the prevailing utility rates to estimate utility costs.
Effective 1 January 2015, the cost of renter's insurance is no longer included in BAH calculations.
Renters' Insurance Costs
Rental insurance costs are calculated using estimated values of household contents. These estimates are based upon income categories, dwelling types, and dwelling sizes.
Once the cost data has been collected, then it is on to step two: calculating the 39 different BAH rates for each location.
STEP TWO: Calculating the BAH Rates
Once they've figured out average housing costs for each location, then there is the calculation of the BAH rates. There are 39 different BAH rates used for each specific geographic area. That's a lot of numbers.
First, there is a formula for how much housing would be required by a typical servicemember of a particular paygrade. Each paygrade is designated an amount that corresponds to a specific size housing unit, or a percentage between two housing sizes.
- An E-6 with dependents receives the rate for a three bedroom townhouse, as does an O-5 without dependents.
- An E-4 without dependents receives the rate for a one bedroom apartment.
- An E-1 with dependents receives the rate for the midpoint between the cost of a two bedroom apartment and a two bedroom townhouse.
- An O-3 with dependents receives the rate for a three bedroom townhouse.
The designation of "how much house" might be required at each paygrade is the subject of much disagreement. Whether you think it is too much, too little, or just right, that's the determination upon which BAH rates are calculated. For more details and the formulas for each rank, see How Much House Do You Rate?
I know it often seems like the changes in BAH rates don't make any sense, but you can see that there is a lot of research and statistical information that goes into making these rates. I can't imagine a more accurate or fair system, even if it often seems wacky.