Benchmarks: How does Arizona's Cost of Living Compare?

Marshall J. Vest
Director, Economic & Business Research Center
Eller College of Management

June, 2002

Introduction

This report examines the cost of living in Arizona . Information provided by Economy.com as well as ACCRA is examined. Relative living costs are important measures of a region's competitiveness since business location decisions and migrating populations favor lower cost locations, other things equal. Since housing costs are the primary factor determining relative costs from city to city, a number of sources are examined that provide insights into Arizona 's housing markets.

Methodology

Economy.com measures living costs by including such items as household expenditures on food and other retail goods, housing, utilities, transportation, vehicle insurance, and an “all other” category. Taxes are included in the latter. Expenditures are derived from the annual Consumer Expenditure Survey, published by the Bureau of Labor Statistics. Household spending on each of these categories is estimated for each metro area and then compared to the nationwide average .

The aggregate MSA index is compiled as follows:

An expense index is first created for each of the five cost of living components (housing, food & retail items, utilities, auto transportation, and auto insurance). Then, this index is applied to the U.S.-level actual expenditures for each of these categories. These categories are then summed up to get an estimate of the actual MSA expenditures, and this total is then indexed to the total US expenditures to derive a total cost of living index. Thus, when a certain component's expenditure index is highly above or below the national level, this component will have a greater impact on the local cost index.

For instance, take the case of MSA X, which has expense indexes 10% above the national average for each of the cost components. Thus, the computation of the final cost of living index would look like this:

[(1.10*US Housing Expenditures) + (1.10*US Food & Retail Expend.) +(1.10*Utility Expend.) + (1.10*Auto Transport Expend.) + (1.10*Auto Insurance Expend.)] / (US Expenditures Sum For All 5 Categories)= 1.10, or when indexed to U.S. =100, 110

Living cost data is available only for metro areas (not states). Data is not collected for counties.

Another widely used source for cost of living ( COL ) is from ACCRA . According to their web site, ACCRA is “The nonprofit organization promoting excellence in research for economic and community development.“ It was originally created in 1961 by several chamber of commerce researchers who shared the need to meet, share ideas, and transfer knowledge. The COL index is read as a percentage of the average for all reporting areas for that time period. It is not based on probability sampling techniques, and is gathered by local chamber of commerce, economic development agencies and local business firms. As such, it suffers from lack of quality control and is rather “noisy” (i.e., a large portion of the variation from month to month is due to measurement error and does not reflect changes in cost of living). The index does not measure changes over time, nor does it measure inflation. Rather it shows cost differentials between areas during a single point in time.

Some 59 items are used to calculate the ACCRA overall index in six major categories: Housing, Utilities, Grocery Items, Transportation, Health Care, and Miscellaneous Goods and Services.

Analysis

Economy.com Cost of Living Index

According to data gleaned from an annual study compiled by Economy.com that shows Arizona 's living costs deviate little from nationwide averages. Phoenix is a little higher, Tucson matches national averages, and Flagstaff and Yuma are lower.

In 2000, the most expensive metro area was San Jose , where living costs were nearly 50% higher than nationwide (Exhibit 1). Phoenix ranked as the 40th most expensive metro area, with living costs 4.5% higher than nationwide. Tucson 's index, only slightly below the nation, ranked 76th. Flagstaff followed closely with living costs 3% below the nation (117th), and Yuma was the least expensive with costs nearly 7% below the U.S and a ranking of 182. Las Vegas , NV , which includes Mohave County , ranked 53rd with prices nearly 3% above the nation. Some 315 metro areas were included in the rankings.

Exhibit 1

Trends over time show that cost increases in most western metros exceeded the nationwide average, thus leading to deterioration in the rankings. A decade ago, living costs in Arizona metros were much lower (with the exception of Yuma , which improved its ranking by 41 spots from 141 to 182). In 1990, Phoenix ranked 70th most expensive, with living costs less than 2% above the nation's. Now it ranks 40th. Tucson 's ranking a decade ago was 107, with costs nearly 2% below the average.

Compared to other major western metros, both Salt Lake City and Albuquerque enjoy lower living costs, but both have experienced rising costs during the past decade – especially Salt Lake City , which lost 156 spots in the rankings. Denver started out 2% below, but finished nearly 10% above the national average over the decade. That cost Denver 78 spots in the rankings. Austin and Portland also experienced large increases in costs, losing 62 and 59 spots, respectively.

Exhibit 2 shows values for each component in Arizona 's covered metros. Generally, utility costs and auto insurance are the highest, while housing is the lowest (with the exception of Flagstaff ).

Exhibit 2

ACCRA Living Costs

ACCRA provides a second source for relative living costs. Advantages are that the data is available for an expanded list of some 300 areas, including many smaller communities. Exhibit 3 contains living costs for Arizona communities of Lake Havasu City , Prescott-Prescott Valley , Sierra Vista , and Scottsdale , as well as the larger metros. Unfortunately, data is not available for important competitors such as San Jose , San Francisco , Seattle , or Austin , as shown in Exhibit 1.

Exhibit 3

With the exception of Yuma and Tucson , all of Arizona 's urban areas have above average costs. Housing and health care are the highest for the more expensive areas, while utility costs stand out for Tucson .

The two sources, ACCRA and Economy.com, produce generally the same rankings, although the index numbers are different (as they should be since the components are not the same). Both sources show living costs well above average in Phoenix (7.2% in ACCRA and 4.6% in Economy.com), Tucson slightly below average (1.0% and 0.3%), and Yuma well below (3.2% and 6.8%). Flagstaff is 3.6% above or 3.0% below, depending on which source you choose. Looking at the components for Flagstaff , housing costs are comparable as is transportation, but utilities and food costs are much lower in Economy.com's calculation.

Is Arizona 's Housing Affordable?

Housing is the most important determinant in explaining regional differences in living costs. How does the cost of housing in Arizona compare? Is affordability a problem? Several sources of data are available that help address these questions.

The National Association of Homebuilders produces the Housing Opportunity Index (HOI), which measures the percentage of homes sold that a family earning the median income can afford to buy . The 2001Q3 ranking was based on more than 750,000 sales of new and existing homes in 186 markets from across the country. Families earning the median U.S. income of $52,500 could afford to purchase 61.5 percent of all the homes sold nationwide. In computing the HOI, NAHB uses the national weighted interest rate on adjustable- and fixed-rate mortgages.

In recent years, housing has become more affordable as interest rates trended downward and incomes grew faster than housing prices increased. The data show that housing in Arizona 's metro areas is at best, near the middle of the pack nationally and at worst, not very affordable (Exhibit 4). Phoenix-Mesa ranked 2nd in western markets and 88th nationally (out of 186, a higher number is better) with 70% of area homes being sold affordable by families earning a median income of $54,900. A median priced home in Phoenix was $149,000.

Tucson MSA ranked 9th in the region (122 nationally) with 61.3% of homes sold affordable by families earning a median income of $46,000. A median priced Tucson home was $135,000.

The Las Vegas MSA, including portions both in Nevada and Arizona , ranked 6th regionally (103rd nationally) with 66.6% of homes sold available to families with median incomes of $52,100. Median home price was $150,000.

Flagstaff MSA, covering portions of Arizona and Utah , was Arizona 's least affordable market, ranking 24th regionally (152nd nationally) with 48% of homes sold available to families earning the median income of $46,800 and with a median home price of $155,000. The Flagstaff market is unique in that a large portion of their market reflects pricey second homes owned by Phoenicians.

Exhibit 4

A second source of information is provided by Arizona State University 's Real Estate Center, which produces an annual “Housing Affordability Index” (HAI) for single-family homes in metropolitan Phoenix . This series allows comparison of affordability over time. A HAI index value of 100 indicates that a typical family has exactly enough income to qualify for a mortgage on a median priced home. An index above 100 indicates a family has more than enough income. For example, an index of 120 indicates a family has 120% of the income necessary to qualify. An index below 100 signifies a family does not have sufficient income to qualify. For example, an index of 86% indicates a family earning the median income has only 86% of the income necessary to qualify.

In the resale home market, since 1990, families with the median income have had at least enough income to qualify for a median priced home (Exhibit 5). However, as median home prices have steadily increased, the excess income families have had over the amount necessary to qualify has eroded, driving affordability downward. In the new home market, families have had 100% or more of the income necessary to qualify for only three of the 17 years measured for the HAI (Exhibit 6).

Exhibit 5

Exhibit 6

Finally, the U.S. Census Bureau's annual report “Housing Vacancies and Homeownership Annual Statistics 2001” released in January 2002 shows that homeownership in Arizona has been steadily increasing since 1995 (Exhibit 7). In 2001, Arizona placed 38th in the nation and 7th in the west, with 68.1% of Arizona households owning their own homes, compared to 67.8% of households nationally. Statewide, homeownership surged to a high of 69.3% in 1992, well above the US rate of 64.1%. Decreasing in the 1990's, homeownership fell to 62% by 1996, at which point the rate again began to climb.

Exhibit 7

Of Arizona 's immediate neighbors, Utah has consistently had the highest homeownership rate hovering around 70% through the 1980's and 1990's and recently moving closer to 75%. California has had the lowest homeownership rate of states bordering Arizona with its rate slowly increasing since 1984, from less than 55% to close to 60%, still well below the national rate. The data from the 2000 census tells a similar story, although one should use caution not to read too much into the change in rankings from 2000 to 2001 (Exhibit 8). Year-to-year changes may be due as much to sample and measurement error as to actual changes in homeownership.

Exhibit 8

The Census Bureau report includes a general homeownership rate for “inside Metropolitan Areas” as a standard of comparison when considering metro areas. Homeownership in the Phoenix-Mesa MA has remained well above the Inside MAs rate since data collection began for cities in 1986. In 2000, Phoenix-Mesa homeownership reached the all-time high of 70.7%, falling slightly to 69.2% in 2001. Homeownership in the Tucson MA has remained consistently below the Inside MA rate, but has been improving, reaching its high in 2001 with 64.4% of households owning homes, compared to the Inside MA rate of 67.8% (Exhibit 9).

Exhibit 9

Homeownership in the Phoenix-Mesa MA compares well with other western metro areas (Exhibit 10). In 2001, three metro areas were above the Inside MA rate of 67.8%. Salt Lake City – Ogden UT MA had the highest rate at 72.9%, followed by Phoenix-Mesa with 69.2%. In third place was Denver , CO with 67.7%.

Exhibit 10

Demographic Profiles from the 2000 Census recently released by the U.S. Department of Commerce contain homeownership information that is more accurate than the estimates from the Current Population Survey (CPS). Homeownership rates for Arizona counties are shown in Exhibit 11. For Arizona , the numbers compare rather closely. From Exhibit 8, 68.1% owned their own home in 2001. From the exhibit below, the number for 2000 was 68.0%. Comparisons for metro Phoenix are 69.2% and 67.5%, respectively. For Pima County , the numbers are 64.4% and 64.3%. Summary file 3, to be released in early fall 2002, will contain estimates of homeownership down to the census track level.

Exhibit 11

References

ACCRA ; <http://www.accra.org>.

Markey, Francis X. and Michael Burt, North American Living Costs, 2002 Edition, Economy.com. <http://www.economy.com/default.asp >.

National Association of Home Builders, Housing Opportunity Index;

<http://www.nahb.com/facts/default.htm>.

Arizona State University , College of Business , Real Estate Center, Housing Affordability Index: Metro Phoenix, <http://www.cob.asu.edu/seid/arec>.

U.S. Census Bureau , “Housing Vacancies and Homeownership Annual Statistics 2001” released in January 2002; < http://www.census.gov/hhes/www/housing/hvs/annual01/ann01ind.html>.

U.S. Census Bureau , Census 2000 Supplementary Survey , released in May 2002;

<http://www.census.gov/c2ss/www/Products/Profiles/2000/index.htm>.

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