A Better View of Poverty Rates: We Must Consider the Cost of Living

This week a number of wire services picked up a story in which states are ranked according to which states are the "most expensive states to raise a family." The list, which was created by a private company to drive web traffic to its site, attempts to quantify the cost of raising a family by factoring in government mandated family leave, the cost of child care, and other factors.

The use of mandatory family leave is rather novel, given that mandated leave raises the effective minimum wage for many workers, and thus negatively impacts the least-skilled workers the most.  Nevertheless, the list appealed to the common-sense notion that there's more to one's standard of living than a relatively high income. The cost of living is an important factor.

The US Poverty Rate Does Not Account for Local Cost of Living 

Given the importance of the cost of living, it is very problematic that the official poverty rate totals for US states do not take costs into account.

When measuring poverty rates internationally, poverty is just defined as households that make 50 percent or 60 percent of the national median income. Although these measures often attempt to take into account differences in the cost of living among different countries, measuring poverty this way provides its own set of problems. It simply makes poverty a purely relative measure, so we end up with a situation where purchasing power for a median household in one country (say, Portugal) is actually lower than a poverty-level household in another country (say, the US).

The US official measure, on the other hand, attempts to get around this problem by defining the poverty rate as an actual dollar amount based on what a household can buy. The federal government has set the poverty income at $24,250 for a family of four in 2015.

The problem is this dollar amount is applied nationwide and then used to calculate poverty rates. So, a household in Arkansas at this income level is deemed "poor" while a household in California at the same income level is deemed equally poor. However, the cost of living in much of Arkansas is quite a bit lower than in much of California.

If we fail to adjust for the cost of living, the poverty rate  map looks like this:

In this case, the highest poverty rate is found in Mississippi with a rate of 23 percent, with Arizona and New Mexico close behind at 21 percent and 19 percent, respectively. New York and California are a dozen states down the list with poverty rates 15 percent for both. (See here for full list based on 2009 calculations.)

Many have noticed certain regional trends here, and that has led to a myriad of articles claiming that so-called "red states" have higher poverty rates than the "blue states." In many cases, "red states" is really code for "low tax" or "free-market-ish" state. In other words, this map "proves" that low taxes and freer economies cause more poverty.

This might be a conundrum if it were not for the fact that this measure of poverty completely ignores the plight of low-income households in states where the cost of living is very high. The biggest offenders here are, not surprisingly, California and New York, where rents and the cost of living in general is very high.

The feds have long recognized the discrepancy here, and in the fine print have long noted that poverty rates should only be used as very general "guidelines" or measures over time. Comparisons among states are discouraged.

That doesn't stop pundits from claiming that blue states like California and New York have been successful in combating poverty through tighter regulation of business, and higher taxation.

If we adjust the states and poverty rates for the cost of living, however, the map looks a bit different:

In this case, the state with the highest poverty rate is California at  23 percent. Arizona and Florida are close behind with rates of 22 percent and 20 percent, respectively. New York has risen to sixth place with a poverty rate of 18 percent, while Mississippi has fallen to eighth place with a rate of 17 percent.

Here we see our bias-confirming assumptions no longer seem to apply since  no correlation is apparent along the lines of the red-state/blue-state claims. Right-wing Indiana, at 15 percent, is more or less equal with left-wing Illinois, while Mississippi and New York, with widely divergent public policy regimes, also have similar poverty rates. (See Table 3.)

Obviously, we have to look somewhere beyond our neat-and-nice ideas about red states and blue states to come up with an explanation.

Of course, poverty can be a function of so many things, that it's impossible to generalize. Public policy is certainly a factor, but so are cultural factors, access to capital, the transportation infrastructure, and more. Some states are influenced by the presence of Indian Reservations (such as Arizona) where local economic policy is more influenced by federal law than state law.

But most of the discussion about "rich states" and "poor states" has long been skewed by the fact we tend to ignore cost of living.

As a final illustration, we can look at median incomes from each state. The median income figures put out by the census bureau do not account for regional "price parity."

Using just the basic median income numbers from the Current Population Survey, we get this:

The US median income is $51,849, and many high-cost states come in well above this, with Hawaii at $59,244 and California at $57,688.  Meanwhile, Mississippi and Louisiana come in at $39,011 and $39,637, respectively.

State median incomes vary by as much as $31,000, with New Hampshire coming in at $70,063 which is $31,051 higher than Mississippi.

But once we adjust incomes for price parity, we find that many of the high-income, high-cost states fall quite a bit in the list:

First, we notice that this compresses the variation in median incomes. The difference between the highest-income state (New Hampshire at $66,159) and the lowest income state (Louisiana at $43,462), shrinks to $22,697.

We also notice that New York now has the second-lowest median income in the country, right between Louisiana and Mississippi. New York now has a real median income of $44,326, while Mississippi has a real median income of $44,944. California and Hawaii fall from being near the top of the list to below the national median income, with median incomes of $51,369 in California and $50,984 in Hawaii.

Basically, the purchasing power of a median household in New York or California is much lower than has been traditionally suggested.

This is also important to keep in mind when comparing US median incomes and poverty rates to foreign countries. Much of the US is very inexpensive in terms of cost of living and well below northern Europe, New Zealand, Australia, and even Canada.
Maps and graphs by Ryan McMaken.

Is Living-at-Home an Indicator of the Standard of Living?

In this article, I noted that median incomes — even when adjusted for cost of living, taxes, and social benfits — are higher in the United States than in Europe. What's more, Americans at poverty level (i.e., 60% of national median income) have more purchasing power than median-level households in many European countries.

But what are some outward indications of this? The UNICEF report on childhood poverty, for example, attempts to quantify the effects of poverty by asking extremely subjective questions like "Did you feel stress this week?" and using the answer to compile a type of index. The problems with indicators such as these should be obvious, since "stress" can mean any number of things.

But let's try for a somewhat more concrete manifestation of a low standard of living: adults living with parents.

In the US, at least, it's been long accepted that new household formation is an indicator of the state of the economy. Specifically, it is assumed that young people who can find gainful employment will be able to move out of their parents' homes more quickly, and also potentially find spouses and/or have children sooner. Economic factors are generally blamed on trends in living at home, as with the discussion about the "boomerang effect" during the most recent business cycle.

This has been the case historically in the US as the marrying age of Americans has fluctuated over time and geography with the availability of land, which was a key factor in economic self-sufficiency in an agrarian setting.

It appears to have been an important factor in Europe as well, since in pre-industrial times, there was little land available for purchase or settlement — and even less in the way of manufacturing jobs — and adult children often had to wait to simply inherent the family lands rather than attempt to find a new household.

So what percentage of adults ages 25-34 still live with their parents nowadays? According to Eurostat, the percentage of adults in this group that still live at home varies substantially from country to country:

The US numbers are from the Census. (Men tend to live with their parents in much larger percentages than women, by the way.)

The percentages here swing quite a bit between 57 percent in Slovakia and Denmark at 1.4 percent.

It's reasonable to accept that cultural factors may be at play here.  Clearly, living at home with one's parents appears to be frowned upon more in Scandinavia than in other rich countries of similar median income levels.

Nevertheless, if we do plot the living-home numbers against median disposable income, we do see a pretty clear correlation:

The countries where the median household has more purchasing power have fewer cases of adult children living with parents. Few should be surprised to find Greece and Portugal up in the top left of graph, for example. Almost all countries with median incomes above $20,000 have living-at-home percentages below 20 percent, while almost all countries with median income below $30,000 have living-at-home levels above 30 percent.

While it's not a perfect proxy for household purchasing power, the percentage of adults that continue to live at home in the prime family formation years does give us some insight into the real-world implications of the fact that real disposable income is lower in most European countries than it is in the United States.

A note on the data: This is all 2013 data, except for Turkey, which is 2007 (the most recent available.) The US data matches up with the Euro data on the age of the adults measured (i.e., 25-34), although in the case of the Euro data, it includes married or cohabiting adults children living with parents. These people are excluded in the US data. Fortunately for us, though, the percentage of people living at home who were also married or cohabiting is under 5 percent. 

Metro Denver: Average Apartment Rent Growth Sets New Record During Second Quarter

Third quarter multifamily vacancy and rent data will be coming out in a about a month, but let's have a closer look at the second quarter's numbers. If current trends are any indication, the third quarter — which tends to be the strongest quarter of the year for multifamily — will be another period of low vacancies and high rent growth.

The first graph shows the overall apartment vacancy rate in metro Denver through the second quarter of this year. The rate was 4.5 percent for the second quarter. that's down from the first quarter rate of 4.9 percent, and down from 4.7 percent during the second quarter of 2014. So, vacancies are low, given that 4 percent is pretty much as low as the vacancy rate ever goes in the metro area. From a tenant perspective, it's about as easy to find an apartment now as it was during the final days of the dot-com boom:

And when vacancy rates get low, we generally expect rent growth. But this time around, we're seeing some of the largest rent growth we've ever seen since the survey was first initiated in the early 1980s. The average rent in metro Denver during the second quarter was $1,265, which is the highest rent ever recorded in nominal terms. It's also the highest rent ever recorded in real terms, but I'll have to adjust the rents for inflation in a future post. The current acceleration in rents outpaces the 1990s:  

In fact, the past three quarters, when measured in year-over-year comparisons, show by far the largest YOY growth in rents ever recorded.  The second quarter's average rent of $1,265 was up an enormous  13.2 percent from the second quarter of 2014 when the average rent was $1,117. The YOY increase was over 12 percent for both the fourth quarter of 2014 and the first quarter of 2015:

Thanks to continued in-migration and a relatively small amount of new single-family construction, multifamily housing remains the most feasible option for many households. Those seeking affordability will move outward from the urban center to more affordable C-class units in further out neighborhoods. Some households will double up or take on roommates. 

The population growth data, though, won't come in for a year after the fact, so it's hard to know to what extent a lack of affordability is impacting in-migration at this time.

Compared to to other markets, the Denver market is experiencing some of the highest rent growth rates in the nation. But, of course, rent level remain well below those in San Francisco. 

Note: The report also tracks median rent, although, at this time, there is no significant difference in the trend between median rents and average rents. the median rent during the second quarter of 2015 was $1,225, which was up 14.7 percent from the 2nd Q 2014 median rent of $1,067. The median rent during the first quarter of 2015 was $1,203.

Colorado One of the Best States for Property Tax

This map from the Tax Foundation shows that Colorado has some of the lowest property taxes in the nation:

This should not be interpreted as a proxy map for which states have the lowest overall tax burden, for example. Note that Texas has relatively high property tax. But, Texas has no income tax so there's little we can discern about taxes in general from this map.

But when thinking about property taxes, it is useful to note that property taxes are especially damaging to people on fixed incomes like retirees and disabled people. Old people with low incomes, for example, would do fairly well in a state with high income tax and low property tax. But if property taxes are high, those seniors would get pummeled by repeated increases  in the property tax.

Denver Continues to Outpace the Nation in Latest Case-Shiller Home Price Index Data

Case-Shiller released new home price index data for July this week. As has been the case since 2012, the data shows continued increases in home prices. The first graph shows the index value for both the nationwide 20-city composite index, and the metro Denver index:

 

While the trend has clearly been upward in recent years, we are now seeing that a plateau has been hit in both the Denver metro area and in the composite index. Of course, the metro Denver plateau around ten percent points to continued strong gains in prices, and is a reason for current homowners and landlords to be happy. first time homebuyers, on the other hand, have less reason to be happy. 

At the national level, though, the composite index suggests more of a cooling in the market. Growth rates are clearly down from where they were back in 2013, and outside of Denver and San Francisco, price growth has moderated throughout many of the cities covered in the index.  Index growth is now flat around 5 percent, and has been so since last September. With interest rates at historic lows, this further suggests an inflexibility in the market that refuses to take off in spite of high accomodative monetary policy. 

In Denver, however, in-migration continues to drive strong price increases, though. The second graph compares the rate growth of the composite index and the Denver index.  Denver is clearly outpacing the nation overall.

Note also that the 2-city composite index is still below its former peak level. July 2015's index number was still 11.9 percent below the peak level, reached during July 2006. Metro Denver's July value, however, was well above its former peak and is at an all-time high. During July, the metro Denver index was 22.1 percent above the 2006 peak achieved during August 2006.

Comparing Whole Countries on Murder Rates Is Often Misleading

We often see the United States compared to a variety of other countries in terms of life expectancy, murder rates, and more. But, it's a bit dishonest to compare a country the size of Portugal, for example, with the United States.Portugal has ten million people and is not geographically diverse. The United States has more than 300 million people, and is extremely diverse in its geography.

So, it makes much more sense to compare the particular states within the US with foreign countries, and most people tend to underestimate the diversity in factors such as life expectancy and murder rates among states.

For example, the murder rate in Oregon (2.0 per 100,000) places it about 160th among 218 countries measured. That's quite low, and well below the US overall rate of  4.7 (per 100,000), which places it at 91st in the world. In other words, there are many places in the US that are well below the national murder rate, including Iowa, Wisconsin, and Colorado. If we were use this more detailed analysis, we would find that, in spite of claims that the US is a relatively high-crime country, much of the US is actually quite moderate, or even low, in this regard.

Were we to do this, we would then be asking ourselves not why the US murder rate is what it is. We would be asking ourselves what it is about Maryland, Louisiana, and South Carolina that are driving up the US murder rate.

Indeed, this should be done for other large countries as well. Mexico is a large country, so it's of little value to simply speak of the murder rate in Mexico as high. The question is this: where is the murder rate high in Mexico?

If we look at this analysis from The Economist, we find that the murder rate in much of Mexico is on a par with Costa Rica and the Bahamas.  And almost no one ever says "don't go to the Bahamas, or you'll be beheaded!" The perception of Mexico is as a high-crime area, and the Bahamas are seen as a serene place to vacation. But the answer is really more complicated than that.

The murder rates in Mexican states vary so widely that Yucatan state has a murder rate equivalent to the very low-crime country of Finland, while Chihuahua state has a rate equivalent to El Salvador, one of the alleged murder capitals of the world.

And if you want to take a vacation soaking up some sun in Cabo? No problem, amigo, because the murder rate in Baja California Sur is lower than the murder rate in Texas.

The overall murder rate is 18, but note the diversity:

 Source: The Economist.

And here are two wonderful maps I came across, which appear to be from an earlier version of the UNODC Global Study on Homicide.  Russia is another case where it's obviously useless to talk about the country-wide murder rate.

Colorado Foreclosures Down 19 Percent During Second Quarter

Foreclosure totals in Colorado during the second quarter of 2015 remained well down from the 2009 peak totals. There were 2,282 foreclosure filings during the second quarter of this year, which was a drop of 19 percent from the second quarter of 2014. There were 1,063 foreclosure sales at auction during the second quarter of this year, dropping 34 percent from the second quarter of last year.

Back in 2009, filings had peaked at 12,135 during the second quarter, and sales peaked at 6,686 during the first quarter of 2010:

Foreclosures are on schedule to end the year way down from 2014. So far, this year, there have been 4,154 filings and 2,208 sales at auction, which means at mid-year, filings and sales are both down 33 percent from where they were at mid-year last year. 

For more, see the state of Colorado full report:

2015_2ndQ Foreclosure Report by Ryan McMaken