How BAH Is Calculated

House in hands.

It’s a common question:  how in the heck is Basic Allowance for Housing (BAH) calculated?  It’s particularly frequent during this time of year, as we wait for the new year’s BAH rates to be announced in mid-December.

On the surface, it often seems that the BAH rates make no sense.  In fact, they are very carefully researched and based upon facts and formulas.  There are three main parts to understand:  what BAH is designed to cover, how the cost information is collected, and how the collected information is used to make the rates that fulfill the design of the allowance.

What BAH Is Designed To Cover

BAH is designed to cover a portion of the housing costs, including both rent and utilities in the area.  It does not consider mortgage payments or family size.  It is based upon a table of how much housing is 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.

For example:

  • 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” is appropriate for each paygrade is the subject of much disagreement.  You may think it is too much, too little, or just right, but the important part is that these are the sizes and types of housing that are used to determine the rates.   For more details and the formulas for each rank, see How Much House Do You Rate?

Collecting the Cost Information

BAH rate calculations include two parts:  rental housing costs and utility costs.

Rental Housing Costs

The Department of Defense hires a contractor to survey approximately 400 rental markets each year.  The contractor is looking for median rents, utilities and rental insurance 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.

Making Sure That The Data Is Right

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.

Utility Costs

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.

Calculating the BAH Rates

Once they’ve figured out median rents and average utility 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.

Once the calculated housing costs are compiled for each of the 39 levels, the amount of BAH is calculated based upon a percentage.  Historically, BAH was calculated at 80% of the calculated housing costs.  During the last two decades, the BAH calculation was changed to pay 100% of the calculated housing costs.  Under current law, BAH percentage rates will fall each year until BAH payments are 95% of calculated housing costs.

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.

As a note, I often hear complaints from military families that BAH for their area doesn’t cover their housing costs.  In nearly every case, the family is choosing to live in a house that is larger than the housing that is being used to calculate costs.  While I understand the desire to live in a larger house, especially if you have a larger family, I think it is a little unfair to claim that rates are too low when you’ve made the choice to live in a larger house.  Every family has the option to choose their size and type of housing.  If they spend more than the amount allocated for the service member’s rank, then they’ll have to pay out-of-pocket.  If they spend less than the amount allocated for the service member’s rank, then they’ll have money left over to use for other purposes.  This puts the decision in the hands of the individual, which seems perfectly reasonable to me.

If you have questions, or know something that I don’t know, please tell me in the comments!

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.