An article published by the Federal Reserve, “Improving Housing Payment Projections during the COVID-19 Pandemic,” examines the relationship between renters’ confidence about paying next month’s rent on time and whether they subsequently pay on time. The study found that approximately 36% of renter families who expressed no confidence in May about their ability to pay next month’s rent on time nevertheless did so in June, as did 71% of those with slight confidence. These families, however, may still be in financial distress because they may have borrowed, depleted savings, or cut back on other necessities in order to pay rent.
The authors rely on a sample of homeowners and renters who took the weekly Census Bureau’s Household Pulse Survey in both the last week of May and the first week of June. They examine respondents’ answers to two questions: (1) “How confident are you that your household will be able to pay your next rent or mortgage payment on time?” and (2) “Did you pay your last month’s rent or mortgage on time?” Among renters with no confidence in paying June’s rent on time, 36% later reported having paid on time. Seventy-one percent of renters with slight confidence paid on time, as did 86% of moderate-confidence renters, and 98% of high-confidence renters.
The authors created two methods of predicting whether renters would pay next month’s rent on time. The first model uses both survey questions to set conditional probabilities for future payments. Each confidence level is associated with a probability of payment based on the share of renters at each confidence level in May who actually paid their rent on time in June. The second model is based only on renters’ level of confidence. It assumes that all families with at least moderate confidence of paying rent on time next month will do so, and those with no or slight confidence will not. To test these models, the authors then estimated the payment rate for July using confidence levels in June and compared the results to actual payment rates in July.
The authors estimate that 82% of renters would pay rent on time in July, using their first model. Their second model that included only the question about confidence predicted 68% of renters would pay their rent on time. The actual share of households that paid their rental payment on time in July was 80%. While the first model slightly overestimates the payment rate, the authors argue it would generally provide better predictions for renters.
The article can be found at: https://bit.ly/2Tqlbxn