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.