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BAH rates to rise an average 7.3% in 2008

The average increase in housing allowances next year will be more than twice what it was for 2007, a reflection of a soft housing market, the subprime loan debacle and widespread rental vacancies across the U.S.

Service members will receive an average Basic Allowance for Housing increase of 7.3 percent effective Jan. 1, compared to an average increase of 3.5 percent last January.

Defense officials say the 2008 increase works out to about $83 per month for service members with dependents. A typical E-4 with family members will get about $63 more per month in BAH, while the average E-8 with dependents will get an additional $79 per month.

The new rates were announced Dec. 12.

See the charts: 2008 BAH rates with dependents and 2008 BAH rates without dependents

Overall, the Pentagon expects to spend $17.5 billion in BAH in 2008 to more than 1.2 million service members, about $600 million more than in 2007.

BAH is designed to cover off-base rental housing costs. It’s calculated using a complex formula that takes into account median current rental rates, the average cost of utilities, and renter’s insurance rates in each of 369 housing areas in the 50 States, said Susan Brumbaugh, director of the BAH program.

While home prices are not part of the calculus, the real estate market has a direct effect on the rental market, Brumbaugh said.

For example, last year’s average 3.5 percent increase came in the midst of a long upturn in home sales that helped tamp down rental cost increases.

“Home sales were still good” in 2006, said Brumbaugh. “The mortgage thing hadn’t collapsed yet. So many people were buying that we had a lot of landlords [with] rentals that were vacant.

“Landlords get nervous when they have a vacancy, so they tend to lower rates so that they can get occupants,” she said.

The housing market flattened out in 2007. Still, in larger cities, the subprime mortgage crisis did not have a major impact on rental markets — or the 2008 BAH calculations, Brumbaugh said.

“You take places like Southern California ... there are enough rentals out there that the subprime problem really isn’t affecting it.”

But in smaller cities, she said, a newly tight loan market might be having an effect.

“Maybe they would like to buy, but they’re not willing to just jump out there right now, so there are more folks looking to rent,” Brumbaugh said. “We … suspect that is what helped [boost] the rates in some areas this year.”

In areas where BAH rates rises from one year to another, all service members see the increase. But the program protects troops already living in an area where BAH drops from the previous year. By law, their rate will never drop below the highest level in effect for their area while they remain residents there. The lower rates apply only to those who are newly reassigned to those areas after the Jan. 1 decrease in any given year.

And since those lower rates are supposed to reflect current rental costs in those markets, no one, in theory, “loses” money on BAH.

Not that long ago, U.S.-based service members were expected to shoulder significant out-of-pocket housing costs, even for modest housing for their paygrade and area. Just seven years ago, troops still paid an average 20 percent of rental housing costs out of pocket.

But a 5-year program of above-average BAH hikes was designed to bring out-of-pocket costs down to zero. Brumbaugh said service members should not have any out-of-pocket costs as long as they obtain housing that the Defense Department deems appropriate for their paygrade.

For an E-4 with dependents, for example, that is a 2-bedroom apartment, while an E-9 with a family should be able to rent a 3-bedroom single-family home in any given area.

Service members who make the personal choice to seek more expansive housing will still pay a portion of their costs out of pocket.

In the Washington, D.C., area, for instance, BAH tops $2,000 a month for senior enlisted troops with families. That amount will go much further in Woodbridge, Va., a suburb 20 miles south of Washington, than it will in Crystal City, an area just south of the Pentagon in Arlington County, Va., Brumbaugh said.

Service members “can choose to live where they want, but many times, there’s a trade-off,” she said. “Every family’s different.”

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