L.A. Area Is Newly Affordable

Last summer, Sue Potteiger gladly accepted a job transfer from Seattle to Irvine. But then the 47-year-old executive at Washington Mutual Bank wondered: How would she, her stay-at-home husband and two grade-school-age daughters afford to live in expensive Southern California?

Six months later, her boxes unpacked and two cats running around inside the family’s spacious, red-tiled house in Mission Viejo, Potteiger says happily: “We were surprised at how much house we could buy. I thought everything would be more expensive. But gas is cheaper, groceries are comparable, and the movies are the same price.”

Potteiger’s discovery may be one of Southern California’s best-kept secrets: The Southland today is more affordable than many people here and elsewhere think.

The main reason, of course, is Southern California’s deep 1991-94 recession, which drove down housing prices sharply and put a tighter lid on prices of many goods and services than in other urban centers. Although still more pricey than most metropolitan areas in America, the Southland now looks like a bargain next to some big cities on both coasts. That gives the region an advantage in job recruiting, among other things.

Consider these two widely followed surveys:

In 1991, the Los Angeles area’s cost of living for a family of four was second only to San Francisco’s, with an index 32% higher than the average large metropolitan area, according to management consultant Runzheimer International. In Runzheimer’s same study for 1997, living costs in five other cities, including Chicago and Washington, D.C., had surpassed those of Los Angeles. The Southland’s combined index for housing, ordinary expenses and taxes had fallen to just 11% above Runzheimer’s national average for cities.

The American Chamber of Commerce’s quarterly surveys show that relative costs for housing, health care and transportation in Greater Los Angeles all fell significantly in the last five years; grocery prices hardly budged; and only utilities rose noticeably. Based on this group’s latest rankings, Boston, Philadelphia and even San Diego posted higher cost-of-living figures than Los Angeles.

Government reports on regional consumer price changes and other statistics also support the trend. “The L.A. region has become more competitive,” says Joe Mattey, a senior economist at the Federal Reserve Bank in San Francisco who specializes in regional economies.

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Some find such surveys unconvincing, and others quickly point out that housing prices, particularly in Orange County, are shooting up again. Indeed, the cost of living can vary widely even within a region. But on the whole, the Southland today is enjoying a rare, if brief, window of relative affordability. Almost 40% of the households in the five-county Los Angeles area can now afford to buy a median-price house in the region. That may not seem like much, but in 1991 that figure was just 24%, according to the California Assn. of Realtors.

“The standard thing is that L.A. is very expensive,” says Jack Kyser, chief economist at the Los Angeles Economic Development Corp. “It’s a myth,” he says, “just like we all work in entertainment and we all hang out at the beach.”

Certainly newcomers have been struck by their buying power, because many came with perceptions of Southern California rooted in the ‘80s, when housing prices soared and costs spun out of control. As those views change, experts say, people and businesses may have more reason to relocate to Southern California.

Some companies already are touting the Los Angeles region’s lower costs in the battle for skilled workers. At Internal and External Communication, a multimedia company in Marina del Rey, recruiting manager Catherine Shortridge is armed with copies of the American Chamber’s latest cost-of-living comparisons.

“Affordability is an issue,” says Shortridge, one of three full-time recruiters at the company, which vies with employers in Boston, San Francisco and other high-tech meccas for technical workers. For most job seekers, she says, Los Angeles’ cost structure isn’t going to be a deciding factor; job opportunities, quality of life, the ocean breeze and other harder-to-measure things tend to be more important. But Shortridge says she still encounters plenty of job candidates who think Southern California is out of their price range. “It’s very difficult to counteract [the idea] that L.A. and Hollywood is so expensive,” she says.

That, in fact, was a consideration for Michelle Schnorre, 33, a program designer and writer who came to Internal and External Communication about a year and a half ago from a large bank in New York City. She jumped at the offer, but everything she heard from friends and the media, she says, led her to believe that Los Angeles is as expensive as New York.

Actually, Schnorre says now, “I got twice the space for half the cost” in her El Segundo rental. Recently married, she isn’t as confident about buying a house she can afford. Los Angeles, she says, isn’t anything like her native Indiana. But it isn’t New York, either. “I can’t think of one thing that is more expensive here than in New York. Not a darn thing.”

For companies considering relocation, decisions often turn on an area’s taxes, space availability and cost, and access to markets and infrastructure. But cost of living also comes into play. A few years ago, United Parcel Service moved its headquarters from Greenwich, Conn., to Atlanta because the company had trouble transferring employees from the field to the very expensive Greenwich area.

“Sometimes cost of living can be a key factor in where they put their offices,” says Jerry Szatan, senior manager at Deloitte Touche Fantus, a relocation consultant in Chicago. “If you can’t get people to move there, you can’t find appropriate people for staffing.”

Some companies also adjust salaries, usually for a couple of years, for workers transferring to a higher-cost region, relying on analyses from firms such as Runzheimer, of Rochester, Wis. For many of its 2,000 business and government clients, Runzheimer develops cost-of-living values for areas by calculating expenses for housing and what it considers usual consumption of goods and services, plus federal, state and local taxes, for a family of four earning $60,000.

Housing and related costs account for the single biggest expense, about 40% of a household’s overall living costs. And that is largely why the Los Angeles area has become more affordable. In the Los Angeles area in 1991, at the peak of the market, the median price of an existing house was $213,400, according to the state realty group. In 1997, that was down by 17% to $177,800. (The drop was led by Los Angeles County, where median prices plunged 19% during that period. In the Inland Empire, the median price last year was $114,300--about half the cost of Orange County.)

By comparison, housing prices in 1997 were up from 1991 in most other urban areas, where the recession was not as deep or prolonged. The median resale price in the Seattle area, for example, was $168,300 last year, up 18% from 1991. In Chicago, it jumped 20% from 1991 to 1997, to $155,600; and the median price rose 12% in the Bay Area to $292,600, virtually all of that occurring last year.

In terms of affordability, the Los Angeles region still trails most big cities, although not by as big a margin. Based on 1997 local income estimates, 39% of Southland households make enough money to buy a median-price house in the region, compared with 52% in Seattle, 55% in Chicago and 57% in Washington, D.C., according to the California Assn. of Realtors. “The most striking feature is that the gap between L.A. and other major metropolitan areas in affordability has dropped,” says G.U. Krueger, an economist at the association in Los Angeles.

But it isn’t just housing that has made Los Angeles more affordable. Over the last few years, consumer prices for most goods and services, as measured by the Department of Labor, have grown at a slower rate in the five-county Los Angeles area than the U.S. city average.

Consumer prices for transportation, a leading category after housing, rose by an annual average of 2.7% in the last five years for all U.S. cities, but increased by only half that much in Greater Los Angeles. Costs for health care and entertainment also rose significantly less in the Southland. And in the apparel and upkeep category, prices in the Los Angeles area actually dropped annually by an average of 1.9% over the last five years, while other urban consumers in the U.S. saw virtually no change.

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Although productivity gains and cheaper imports have helped keep the nation’s inflation rate unusually low in recent years, economists attribute the Southland’s sharper disinflation to its higher unemployment rate, which kept wages down, in turn putting less pressure on businesses to raise prices.

Industry concentration and heightened competition also were factors, and in the retail apparel industry, analysts say, an overabundance of stores and consumers’ continued demands for sales have pushed prices down even further.

“The consolidation of department stores gave them greater ability to put pressure on manufacturers to make goods at lower costs,” says Tony Cherbak, a retail industry specialist at Deloitte & Touche in Costa Mesa. With the Asian economic crisis expected to spur imports to the United States, Cherbak adds, “we’re not going to see an increase any time soon.”

Housing prices, however, are starting to heat up. Median prices in Los Angeles County went up 2% last year and this year are expected to climb at about twice that rate. And by next year, with the local economy continuing to grow and a shortage of housing, the county is likely to see its first double-digit increase since the ‘80s, says Mark Zandi, chief economist at Regional Financial Associates, an economic consulting house in West Chester, Pa., whose clients include most of the nation’s banks.

“The cost of living in L.A. will begin to rise more quickly from here on out,” says Zandi. But the Southland still has time, he says, because it will take a while for supply to catch up with the growing housing demand. “Its cost of living will remain competitive through the end of the decade.”

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A Better Bargain

No Bargain, But Better

The Southland now looks like more of a bargain, at least when rated against five other major cities. In 1991, the area ranked second only to San Francisco in cost of living. By last year, it had fallen to sixth.

Specific Ups and Downs

Annual average price changes, 1993-1997

Housing

LA area consumers: 1.0

All U.S. urban consumers: 2.7

Food

LA area consumers: 3.0

All U.S. urban consumers: 2.6

Apparel

LA area consumers: -1.9

All U.S. urban consumers: 0.2

Transportation

LA area consumers: 1.8

All U.S. urban consumers: 2.7

Medical Care

LA area consumers: 3.9

All U.S. urban consumers: 4.3

Entertainment

LA area consumers: 1.9

All U.S. urban consumers: 2.7

Cost of Living

1997: Rank and Location

1. San Francisco: Total Annual Cost--$80,574

2. New York: Total Annual Cost--$72,562

3. Boston: Total Annual Cost--$82,102

4. Washington: Total Annual Cost--$70,183

5. Chicago: Total Annual Cost--$67,511

6. LOS ANGELES: Total Annual Cost--$66,281

7. Seattle: Total Annual Cost--$63,140

8. Atlanta: Total Annual Cost--$62,140

9. Average U.S. city: Total Annual Cost--$60,000

10 Miami: Total Annual Cost--$59,653

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1991: Rank and Location

1. San Francisco: Total Annual Cost--$87,449

3. New York: Total Annual Cost--$75,986

5. Boston: Total Annual Cost--$71,092

4. Washington: Total Annual Cost--$72,875

6. Chicago: Total Annual Cost--$64,550

2. LOS ANGELES: Total Annual Cost--$79,005

11. Seattle: Total Annual Cost--$59,269

8. Atlanta: Total Annual Cost--$64,241

9. Average U.S. city: Total Annual Cost--$60,000

10 Miami: Total Annual Cost--$60,741

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Note: Cost of living based on what a middle-class family of four would spend on housing, taxes and other living expenses. Price changes are annual averages, 1993-1997

Sources: Runzheimer International, a management consulting firm, Bureau of Labor Statistics