New Orleans is not just beignets and Mardi Gras any more.
According to a new ranking of the quality of life in 50 American cities, New Orleans is the best place to look for value: its housing is currently underpriced for the breadth of amenities the city has to offer. It and the other top four—Tampa, San Antonio, Scranton, and Fort Lauderdale—"have a relatively greater potential for real estate appreciation in the future," write Lynn Fisher, Zhi-Yi Wu, and Kenneth Lusht of Penn Stateís Smeal College of Business Administration.
The most overpriced cities on the team's ranking shouldn't surprise anyone who's gone househunting there: San Francisco, San Jose, Newark, Boston, and Oakland.
Yet in terms of "absolute quality of life," San Jose comes in at number one, with San Francisco and Oakland numbers two and three.
So if these three California cities are tops on one chart and bottoms on another—both prepared by the same research team, using the same data—what do these "Quality of Life" lists really mean?
"Americans like to make lists," says Lusht, a little tongue-in-cheek. "If you ask n people to make a Quality of Life list, you'll get n lists." That explains why the genre is so popular. But why were his own team's two lists different? "There's a reason they differ. We got two different answers because we asked two different questions: the first about absolute quality of life, the second about the tradeoff between quality of life and housing and wages."
A professor of insurance and real estate, Lusht was asked by the Fidelity Fund in Boston to evaluate the ways such lists were made. Lusht recruited graduate students Wu (who wants to do his Ph.D. dissertation on mortgage pricing) and Fisher (a first-year student new to research). Their goal was to rank 100 U.S. cities in the way that would be most useful for investors or for companies looking to move or expand. "Companies are not tied to natural resources any more," Lusht explains. "They don't need to be by a river or on a railroad line. They have no natural homes. So they're chasing people. Whatever connection there is between quality of life and economic health, it will strengthen."
Popular "quality of life" lists, such as those in Places Rated Almanac or Money magazine, are based on surveys. They rate each city on its package of amenities, including "pure" ones such as climate, as well as "purchased" amenities—transportation, education, art and culture, and health care. The dark side also counts, what Lusht calls "disamenities," like the crime rate. Finally the popular lists consider housing costs and wages.
"Their ideal place is somewhere near the beach, 75 degrees every day, very high salaries, and dirt cheap land," says Lusht. "But think about that: If a place has a desirable list of amenities, what happens? Wages are relatively low. Land prices are relatively high. In the popular rankings, these two equal out: they homogenize." Likewise, very high wages and very low land prices (which also homogenize in the popular lists), Lusht says, "are the signs of unattractive places"—you have to bribe people to live there.
Rather than considering housing and wages as amenities, economists since the late 1970s have applied the "no free lunch" principle to city rankings. Using data from the 1997 Places Rated Almanac, the Regional Financial Association's population and income time series, and the 1994 State and City Statistical Abstracts, Lusht, Fisher, and Wu created a mathematical model that used housing and wage information to fix the value of each amenity. Climate had the highest value, followed by education (defined by opportunities for higher education), art and culture (performances, museums, and library usage), and crime. Transportation (in terms of "connectivity," "commute," and "centrality"), recreation (including golf holes, movie screens, restaurants, college sports, protected land, and coastline), and health care (numbers of doctors and hospital beds) were considerably less valuable.
"So now you have a price for each amenity," Lusht explains. "You multiply that times the amount of each amenity each city has—we used its Places Rated score—and get a quality of life score for the city. Then you rank them."
And San Jose, San Francisco, and Oakland come out 1-2-3.
Yet, as the researchers write, "In practice, both land prices and wage rates are somewhat sticky, and rather than react immediately to new information, they adapt over time. Thus at any point in time there is likely to be a lag between the value placed on amenities (the willingness of residents to pay) and the prices reflected by land price and wage differentials.
"The good news is that this type of inefficiency may offer investment opportunities."
To find out where those opportunities might lie, Lusht says, "We compared what our model said the house prices should be to what they really were." And New Orleans shot to the top of the list.
So if you're thinking of relocating to a better business climate, well, Laissez les bons temps roulez!
Lynn M. Fisher and Zhi Yi Wu are graduate students in the Smeal College of Business Administration. Kenneth Lusht, Ph.D., is professor of insurance and real estate and associate dean for research, Smeal College of Business Administration, 409 Business Administration Bldg., University Park, PA 16802; 814-865-1190; kml@psu.edu. This project was funded by the Fidelity Fund, Boston.