A median household income refers to the income level earned by a given household where half of the homes in the area earn more and half earn less. It's used instead of the average or mean household income because it can give a more accurate picture of an area's actual economic status. Median household incomes are frequently used to determine housing affordability.
What Makes a Household
According to the Census Bureau, a household refers to a single housing unit and all of the people that live in it. For example, a studio apartment, a half of a duplex and a mansion are all considered a single household. Family households have related residents, such as a husband, wife and children. People who aren't related who live together such as roommates or unmarried couples, also constitute a household.
The median income is the income level in the middle of a list of ranked incomes. For an area that has five households with incomes of $10,000, $35,000, $40,000, $47,000 and $250,000, the median income is $40,000. In calculating median income, the Census Bureau looks at the incomes of only those people who are 15 or older. Household medians include everyone over 15 who lives in the household, whether or not they're related.
Median vs. Mean
Median incomes are used as measures because they tend to more accurately represent what people make in a given area. Given the list of the five-household area with incomes ranging from $10,000 to $250,000, the average would be $76,400, calculated by adding up all five incomes and dividing by five. The average is higher because the highest number on the list is much farther from the middle numbers than is the lowest one. This can skew perceptions of an area's income. The median, which comes from looking at the middle number, gives a better impression of the dataset as a whole.
Median Household Income
Median household income is used in real estate to calculate the affordability of housing. The Housing Affordability Index calculates the cost of the median price home relative to median incomes. When it goes up, it means that more people can afford to buy homes, either because their incomes are higher or because the cost of home ownership is relatively lower. When it dips below 100, home ownership is becoming relatively more expensive, and the median-earning family can't afford the median-priced house.
Affordable housing is also defined relative to median household income. Generally speaking, a home is affordable if its monthly payment is 30 percent or less of its resident's income. If you make $70,000 a year, a house with a monthly payment of $1,750 or less would be affordable for you, which is 30 percent of your monthly income of $5,833. Typically, affordable housing programs are set up to help lower-income households afford houses.