Manhattan, Palo Alto . . . Consider the Cost of Living!Posted on March 31st, 2011
In a recent blog I profiled Ken, a second generation millionaire. His observations generated numerous responses. Many of these came from New York and California-based respondents who said essentially that there are no homes in the mid-$300,000 range in their chosen geographic environment. In fact, the wife of a recently minted medical doctor complained that the couple was "forced" to buy a 7-figure home in Palo Alto, CA since anything less than that was a "fixer upper." Of course, living in Palo Alto is nearly synonymous with being a member of the Income Statement Affluent class.
I spoke with Ken again shortly after reading these observations. I asked him if there were 2 or 3 factors which were most significant in explaining his extraordinary ability to accumulate wealth. He divided them into two categories. First, playing great defense is basic. Two, if you don't live below your means you won't have enough money to play great offense, aka invest wisely. One of the most important decisions that Ken and his wife made was on the defensive side of the ball.
After receiving his MBA, Ken and his wife eventually settled in Manhattan. After "three years of fighting an oppressively high cost of living," the couple realized that they would never be able to accumulate enough wealth in order to become financially independent. Ken sought out a management offering in the "Southern" region. His boss did admonish him by saying that this would be a lateral move, not a promotion. But Ken looked at the move differently. He would be making the same income but intuitively he realized that it would be a lot less costly to reside in the South. That was more than 20 years ago.
Let's examine the hard numbers in comparing the various components of the cost of living for a middle level executive residing in Manhattan versus in a large Southern city. Considering 100 as the norm composite cost of living for the top 100 areas, Manhattan, according to ACCRA's cost of living index 2009, is a 217.9 or 2.3 times that of the community in which Ken and his wife now reside. But more specifically what are the differences in the cost of housing for these two areas? New York's Manhattan has a cost of housing index of 401.5. That is 4.5 times what Ken and his wife are expected to pay according to the statistical analysis. The market value of a home similar to Ken's if situated in suburban New York would easily approach or exceed 7 figures. Plus the property taxes would be 4 or 5 times greater.
Here is a sample of some other Southern cities and their respective cost of housing indices: Charlotte, 80.1; Dallas, 71.6; Houston, 76.6, and Orlando, 87.9. As I mentioned in Stop Acting Rich, "the South is . . . above the norm" for producing a disproportionately large share of the millionaire population. "California and especially the Northeast areas of the United States have less than half the expected number [of millionaires] given their overall household population."
So wait a minute. This guy had a chance to buy Manhattan real estate 20 years ago and didn't take it? BAD call, the property would have appreciated into the millions which is why buying expensive real estate is not always a bad idea.On April 6th, 2011, 3:01 PM, Chris Croot said:
The chair of emergency medicine at a Southern university transferred there from UCLA. At UCLA he and his family rented a house because he refused to buy a house. In his current city, he could buy a beautiful house with a mortgage for half of his rental costs in CA. I live in the South also and I can not fathom living in CA or the northeast because of the cost. My next door neighbor is an engineer from San Francisco who moved with Toyota and he and his family are happier.On April 1st, 2011, 2:22 PM, Rick Francis said:
I moved from Palo Alto twelve years ago because I couldn't imagine ever being able to afford a house there. I liked the Bay area but it is just far too over crowded. The unaffordable housing also causes miserable traffic because people end up commuting much farther to try to get a less outrageously priced house.
That is exactly why we live in the Midwest. I have family on both coasts that complain about the cost of living but would never deign to move to the midwest.
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