In recent years, there has been a large outflow of residents from California and New York to places such as Texas and Florida. The concept of “revealed preference” suggests that these fast growing states might be the best places to live. But there are actually two ways of thinking about the “best place”:
1. The best place judged purely on amenities that affect the quality of life.
2. The best place accounting for both amenities and the cost of living.
As an analogy, the best car might be a Rolls Royce. But the best car in terms of value for the dollar might be a Toyota Camry. If so, you’d expect most people to opt for the Camry, even though there is a sense in which the Rolls Royce is a better car. In today’s post, I’d like to consider the best place to live in the Rolls Royce sense, not the Camry sense.
Check out this headline and subhead in the OC Register:
20 least-affordable US cities to buy a home are all in California
And 51% of Top 150!
I was thrilled to see this story, as it suggests that I have chosen to live in the Rolls Royce of states. The OC Register defines “unaffordable” based on the ratio of average home prices to income. But obviously these places are not literally unaffordable, as 39 million people live in California. Instead, think of that high ratio as reflecting a high degree of amenities. People will pay more for the privilege of living in California. As an analogy, a high P/E stock has intangible positive attributes that don’t show up in the usual metrics such as current profits.
It might seem odd to claim that California is the best place to live, given its widely publicized problems such as over-regulation, traffic, crime and homelessness. But given a choice between trusting the media and trusting the market, I’ll go with the market every time. The market is telling us that California is a great place to live. Even the homeless prefer to live here. People aren’t leaving because California is a bad place, as less housing demand would lead to the sort of low home prices we see in Detroit. People are leaving because of less housing supply; California refuses to build more homes. California residents have decided that they simply don’t want more people. (I disagree with that decision, but I’m in the minority.)
If I’m right, then we might expect that within California the most unaffordable places are those that have fewer problems. Orange County is not completely problem free, but it has less over-regulation, traffic, crime and homelessness than the rest of California. Thus it’s worth noting that although Orange County contains less than 10% of California’s population, we have 10 of the top 25 California cities for unaffordability. That suggests that Orange County might be the best county in America. The most unaffordable place of all is Newport Beach, an upscale coastal community in OC.
So to answer the question in the blog title: Newport Beach is the best place to live in America, if not the entire world.
There are two types of “revealed preference”. The outflow of people from California suggests that we are not the Toyota Camry of states. But revealed preference also shows up in home (land) prices. The high price of California houses suggests that we are the Rolls Royce of states.
PS. I believe the OC Register list was limited to cities with more than 100,000 people. Thus it’s possible that smaller places like Beverly Hills and Laguna Beach are even more unaffordable.
READER COMMENTS
Kevin Erdmann
May 3 2024 at 1:28am
When you drill down deeper, compared to other places, it is the worst neighborhoods with the least amenities in LA that are more expensive than similar neighborhoods in other cities.
Craig
May 3 2024 at 9:18am
If you pay for a Rolls Royce you can go to your driveway and see an actual Rolls Royce. The problem in Laguna Niguel is that you might pay for a Rolls Royce but you get a Corolla.
https://www.realtor.com/realestateandhomes-detail/23842-Windmill-Ln_Laguna-Niguel_CA_92677_M18356-89928?from=srp-list-card
$1.6mn and its flat out just not a particularly nice house.
J Mann
May 3 2024 at 10:23am
If people are paying $1.6 million for meh homes in bad neighborhoods in California, then there are presumably other factors that make it worthwhile to them — the climate, employment opportunities, or something else.
Italian cars had a comparable reputation when I was growing up: unreliable, expensive to repair, but a delight to drive and look at and a huge status symbol.
Scott’s right that the most expensive real estate in the country is presumably the most desired. That said, I wouldn’t want a Rolls if I could have an Acura and a big pile of money instead, but if you want a Rolls and can afford one, there’s nothing wrong with buying it.
Craig
May 3 2024 at 10:36am
“If people are paying $1.6 million for meh homes in bad neighborhoods in California, then there are presumably other factors that make it worthwhile to them — the climate, employment opportunities, or something else.”
The logic is correct, but I did this as between North Jersey (which carries the metro NY premium) and FL and what you find out is that you’re just getting screwed. North Jersey isn’t a Rolls Royce of course, but pay for a Camry in NJ, you get a Corolla, pay for a Camry in FL and you get a Lexus and the taxes you’re not paying to NJ is paying for that Lexus no less and the home in TN I might add.
steve
May 3 2024 at 11:47am
Life is more than just taxes. However, if that is your priority you move to FL. If you want access to the high paying jobs in NYC and superior schools you move to NJ. Markets will determine how much each of these preferences is valued. Of note, the city with the highest real prices in Florida is Jupiter Island. Its location suggests that it’s not so much taxes or place of work but a sunny, exclusive island right on the water that people are willing to pay for. When i lived in Fl the beachfront properties always cost more. You could have a shack on the water and sell it for a premium.
Steve
Craig
May 3 2024 at 12:38pm
“Life is more than just taxes.” — and yet they’re levied? Hmmm
Here’s the thing, if you’re sitting on a NJ Transit bus with 57 souls who you hope found a BOGO coupon for deodorant at the Stop & Shop with two herniated discs jamming into your nerve for another starlit journey into Manhattan before your babies are awake and then come back after they’re asleep. At that point you might have a different take on ‘taxes’ and the imposition it represents on our finite time on this planet. That was ‘normal’ but now I realize that shouldn’t be ‘normal’ and those taxes is time and they took that time from me which I now retroactively resent.
J Mann
May 3 2024 at 12:36pm
Not every house is a Rolls Royce. Some are Alfa Romeos or Cybertrucks – they have big upsides in some areas and big downsides in others. But if people want them enough to pay for them, then presumably there’s some upside there for someone, especially if the prices hold over time.
Craig
May 3 2024 at 12:58pm
I understand. I paid the NY premium and now I have this overwhelming sense of loss for having done so.
Scott Sumner
May 3 2024 at 12:42pm
Sorry, but I trust the market over a blog comment. If people are paying high prices, they presumably receive high value. Laguna Niguel is a VERY nice place to live, regardless of the square footage. (Much nice than my own Mission Viejo.)
Craig
May 3 2024 at 2:04pm
If you make 700k and that’s the best you can do because that income is tied to SoCal, ok, for sure nobody crying, but if you can make 700k anywhere and you choose that — de gustibus non est disputandum — but you will be making over the course of 20 years, an 8 figure financial blunder. I made that mistake just with NJ.
steve
May 4 2024 at 11:03am
I lived in Florida. Plenty of places there where you wish they had discovered deodorant especially since the humidity is almost always awful and it stays hot all day. Nice in the winter but then it gets crowded. Not heavy on cultural stuff. Much of central Florida feels like driving around Appalachia.
Steve
Mark Brophy
May 7 2024 at 1:37pm
What if California passed a law to burn 5% of the housing in the state? That would increase housing prices without making it a better place to live.
Todd Ramsey
May 3 2024 at 9:28am
“People are leaving because of less housing supply”
Do California (as opposed to say, Texas) tax and regulatory regimes that hinder business, and therefore job creation, also play a role?
Craig
May 3 2024 at 10:09am
There’s no question there is at minimum some kind of scale effect. If you make a dollar and you’re giving 50%+ to the governmentS, that’s a serious problem. Its like running a race with a ball and chain tied to your ankle. I did this as between North Jersey and FL/TN and your ability to accumulate wealth is just night and day.
David Seltzer
May 3 2024 at 5:29pm
Craig: You are preaching to this choir master. NYC has become so expensive, some are riding trains for 3 hours round trip from Pennsylvania to work there. The trade-off is partially correlated with a city, state and federal tax bite of 50%. I calculated my marginal tax at nearly 65%, killing my consumer surplus. We made the decision to move to Georgia. We love it here. Taxes at some point have a pernicious affect on quality of life. Ceteris paribus, it seems markets, prefer lower taxes to higher taxes.
Craig
May 4 2024 at 9:43am
I was ensconced in the ‘there’s one city in the US and that city is NYC’ mentality, the biggest, the bestest, no debate about it. Atlanta was part of that waking up, I spent some time there and it wowed me, I thought, “This place is awesome”
Scott Sumner
May 3 2024 at 12:44pm
Those factors play a small role, but nowhere near as much as zoning rules. Taxes and business regulations would tend to make houses cheaper in California, thus zoning must be the dominant factor.
Craig
May 3 2024 at 2:00pm
Why would that be? NJ–>FL the NJ property tax payments > entire FL house payment for a home that carried the same nominal price tag but 75% of the size. I guess one could say that but for the property tax the home would cost more? On the other hand, one could say the ‘price’ IS the monthly payment, no?
Scott Sumner
May 5 2024 at 1:39pm
California property tax rates are not very high.
Richard W Fulmer
May 3 2024 at 10:35am
The best place to live is near family and friends.
Henry
May 4 2024 at 7:51pm
Strong agreement from me. We humans are social creatures and needs the fulfillment that friends and family provide. Finland has crappy weather and high taxes, but its people are considered very happy. I lived in a rust belt city for five years with my wife, newborn daughter, and friends. It was great.
MarkW
May 3 2024 at 11:14am
A problem with this analogy is that what people are mainly paying for in the price delta between a Camry and a Rolls Royce is status. When moving up to a Rolls, people are gaining very little in the way of functionality and are arguably losing in terms of reliability and safety (and certainly efficiency). But the Rolls has far more glamor. And, of course, the prices of status symbols must be bid up beyond reason (and the supplies limited, even if artificially and intentionally) or they wouldn’t be strong signals of wealth and position. This is a big part of the reason luxury cars depreciate so much faster — an outdated status symbol isn’t one.
How much does this apply to Orange County? 50-75 years ago (e.g. the ‘Gidget’ era), prices in Orange County were much more normal for the US. Was it not the ‘best place’ then? Is it a better place to live now? I live in a city that has steadily gentrified and I have to say that I preferred it when it was more generally affordable to a wide array of social classes. We, ourselves, have no problem having enough to live here, but we enjoy it less as it becomes more the exclusive province of the wealthy. But if prices in wealthy enclaves are driven up, in significant part, by the status associated with living in a fashionable place, then ‘best places’ are a kind of Veblen good, no?
Scott Sumner
May 5 2024 at 1:43pm
“Was it not the ‘best place’ then? Is it a better place to live now?”
Back then, its population was exploding due to its high quality of life. But lax building restrictions kept the prices down. With building restrictions, the high quality of life now shows up as high prices instead of massive population growth.
Quality of life was high in both periods.
MarkW
May 6 2024 at 4:59pm
“Quality of life was high in both periods.”
Yes, but was Orange County then even particularly expensive relative to the rest of the US? It doesn’t seem so. Earlier in my career, I did some work for a small tech company that was in Costa Mesa, and although it was changing at the time, it had clearly been a blue collar area and kind of still was. Even now, decades later, you look at Zillow, you can find a 1.3M house that’s a 1000 sq ft ranch with one bath built on a slab. The point is not the price now, the point is this was a lower middle-class house when it was built. If this was the best place even then why would anybody ever have been building such basic housing in what was the most desirable place in the country?
Carl
May 3 2024 at 2:38pm
I figured the weather and scenery here allows us to have a 50% crazier government than other states. I guess I underestimated how much crazy it allows us to get away with and still have people willing to shell out for shoeboxes to live in.
Stan Greer
May 3 2024 at 7:54pm
It’s political forces, not market forces, that make housing prices in CA high. Sumner seems to understand that when he mentions the people in CA don’t want more people to live there, but then he forgets immediately what he said. But I don’t think the decisions of the politically powerful in CA reflect the views of the majority.
Scott Sumner
May 4 2024 at 12:18pm
There’s no contradiction. The market price is the marginal willingness to pay, and its higher than otherwise due to building constraints. Don’t forget that “market price” doesn’t mean “unregulated market price”.
Stan Greer
May 5 2024 at 8:22am
Come on, Scott. You said the high price of housing in CA shows that CA is a better place to live than TX, where housing is much cheaper. That’s exactly like saying automobiles in CA are better than in TX because totally counterproductive (IMO) environmental regulations in CA make cars more expensive there. That’s nonsense, and so is your claim that the high price of housing in CA shows that it is “winning” the sweepstakes as the best place to live. By that standard, HI is the best of all!
robc
May 5 2024 at 10:42am
I think HI probably has a good argument for the best of all, so you aren’t disproving Scott’s point.
Scott Sumner
May 5 2024 at 1:47pm
“I don’t understand your comment about California cars. My car (bought in New Hampshire) was not more expensive than in another state. Do you mean gasoline is more expensive?”
The price people are willing to pay for housing shows “revealed preference”. Its far higher in California than Texas. That doesn’t mean California has a better policy regime, indeed Texas has far better economic regulations. It’s advantage is based on things like environment and culture.
Rajat
May 3 2024 at 11:51pm
Coming from an Australian perspective, I can’t emphasise how much climate is a(n absolute and) relative drawcard for SoCal compared to other parts of the USA. Yes, eastern parts of the LA conurbation get very hot in summer, but on average the area has an idyllic climate within 20 miles of the coast – where most people live. Places outside California that many Americans consider to have ‘good weather’, like Florida, Nashville, Austin, and much of the non-Californian Sunbelt, have (in my view) unbearably hot summers and, in many cases, intolerably cold winters. I mean, Austin’s summer is hotter than 90% of the Australian continent’s summer (including areas where almost no one lives), and its winter – while not cold – is cooler than Sydney’s. Nashville’s summer is hotter than Brisbane and Perth’s (Australia’s warmest main cities), but its winter is colder than Hobart’s (Australia’s coldest state capital). Miami’s climate is on par with Australia’s Cairns, which our retirees avoid for cooler parts of Queensland to the south. And forget about places like Phoenix or St Louis. Americans seem to take a continental climate for granted, but it doesn’t have to be that way! I imagine many western and southern Europeans would have somewhat similar views. If I were to move to the US on a long term basis, SoCal would be the only livable option, and I’m from ‘four-seasons-in-a-day’ Melbourne!
Craig
May 4 2024 at 9:38am
500k UK in FL fully resident, 2mn Canadians of various varieties including non-resident snowbirds. Over 12 months, SoCal better climate hands down. From Nov-Apr, SoFlo. SoFlo is NY South and SoFlo weather usually seen as MAJOR upgrade from metro NY by many. Wet season IS hot, but SoFlo is moderated by ocean AND Eveeglades so its almost never over 95, it just doesn’t go below 80 because at night the water pins the temperature up. Air conditioning means you’re not stuck in it. In July the high in SoFlo is often BELOW NYC, the low will be above. By contrast Orlando just a bit inland and not as moderated by water is way hotter in July.
TN is erratic. The winter happens but its usually milder but wont to extremes, ie one day two Xmases ago on Xmas Eve it was -7F which does not happen in NJ but once the jet stream shifted it was 64F 8 days later. It snows but far less and does cover ground for long. Spring starts a full month earlier.
Scott Sumner
May 4 2024 at 12:21pm
“500k UK in FL fully resident, 2mn Canadians of various varieties including non-resident snowbirds.”
You still don’t get it. It’s like telling me that Camrys are better than Rolls Royces because more people buy Camrys. That’s not the right test! How much are people willing to pay?
Craig
May 4 2024 at 3:09pm
No, I get it, the point itself is obviously easy to understand. If you want to say its a nice place among nice places I’m ok with that but when a person from a place starts talking like you are starts showing the same hubris I used to have maybe you need to check your elitism. I’m sorry but you can’t pay a Rolls Royce price for a Camry and call it a Rolls Royce. Its a nice place, I’ve been there, but even by your own standard it wouldn’t be tops. Nice place, yes, head and shoulders above the rest. No.
Scott Sumner
May 5 2024 at 1:58pm
“you need to check your elitism”
The dominant narrative in the media (especially the conservative media), is that California has become a nightmarish hellhole. I’m merely pushing back against that narrative.
Lizard Man
May 4 2024 at 12:19pm
My own personal experience living in one of the “furnaces” in the lower Yangtze was that my body does adjust to the heat, in a way that my body never adjusted to the cold. Now, granted there was one summer where the daily highs broke 100 degrees Fahrenheit each day, and that was uncomfortable. But most of the US sunbelt is cooler than that.
Bob
May 4 2024 at 11:59am
In general yes, the more expensive, the better a place to live, but there are a few things this doesn’t account for:
One is cultural barriers to movement. It’s easy, if you have the money, to move to Newport Beach from somewhere else in the US: You are finding the same things you want, in the same language. Often even the same chain stores. But imagine that a competitively good place was, say, somewhere in Italy. A place where few people speak English, where immigrating to is a large hassle. That alone changes the price, not because it’s worse in general, but because it’s worse for people coming from the US that don’t know Italian. You could say that then maybe it’d still be super expensive, just filled with italians… but there are huge differences in income, so that covers for a lot.
I imagine if, through some magic, we managed to move all the buildings and streets of Barcelona to Monterrey, CA. European architecture and pedestrian streets, a lot of infrastructure based on small commerce. The kind of thing that just cannot be planned and executed all at once: How expensive does it get?
Scott Sumner
May 4 2024 at 12:23pm
Yes, I agree that the English language helps make the US a magnet (and Australia too.)
nobody.really
May 6 2024 at 1:55am
I recall reading an analysis concluding that St. Louis was among the worst places to live. Why? Because it had cheap housing and high salaries. According to the authors, cheap housing proved that people didn’t value living there. And high salaries proved that employers had to pay people a premium to move there.
Needless to say, the chamber of commerce had a different interpretation of the data.
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