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Texas town is the cheapest place to live in US

Harlingen, Texas, has one of the lowest income levels in the U.S. Fortunately for residents of this hot, dry city in the state's southern tip, it is also the cheapest place in the country to live.
Image: McAllen, Texas
Near the Brownsville-Harlingen area (No. 7 and No. 1 on this list) in the southern tip of Texas, the McAllen metro area shares many of its problems: low income, high poverty, and high unemployment. The jobless rate was about 11.4 percent in April, according to BLS data.Bloomberg
/ Source: Business Week

In Texas, it's not all oil wells and rodeos. Despite this state's great wealth and culture, plenty of folks are living a hardscrabble existence. Harlingen, a developing city in the heart of the Rio Grande Valley, has one of the lowest income levels in the U.S. Fortunately for residents of this hot, dry city in the state's southern tip, it is also the cheapest place in the country to live.

The cost of living in Harlingen is about 18 percent below the national average, the lowest level in the U.S., according to price data from more than 340 urban areas provided by the Council of Community & Economic Research, a research organization in Arlington, Va. The statistics cover the period from the first quarter of 2010 to the first quarter of 2011. Harlingen was followed by the urban areas of Pueblo, Colo., Pryor Creek, Okla., McAllen, Tex., and Cookeville, Tenn. The most expensive areas were Manhattan, N.Y., with a cost of living more than twice the national average, Brooklyn, N.Y., Honolulu, San Francisco, and Queens, N.Y.

"We have relatively low income in the (Rio Grande) Valley, including in Harlingen. We have fewer college educated folks" and hardly any high end retailers, says Harlingen Mayor Chris Boswell. Still, the area is growing, Boswell says, and as it develops from an agricultural area into an economy based on light manufacturing and health care, prices may increase somewhat.

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Housing, grocery, and transport costs are exceptionally low in Harlingen: over the year, monthly principal and interest payments for homes averaged only $847, a loaf of bread about 90¢, and a gallon of gas $2.65, reports the Council for Community & Economic Research (C2ER). In Manhattan, the most expensive area, monthly house payments averaged $4,686 (more than five times as much), bread about $2.23 (about 150 percent more), and gas $3.148 (about 19 percent more).

C2ER collects quarterly data on such costs as housing, groceries, transportation, utilities, health care, and other basic goods and services. To calculate the cost of living, the council put the greatest weights on housing and gasoline, as items representing the greatest amount of spending were considered more important. "Housing is the biggest piece of living costs everywhere," says Howard Wial, a fellow for the Metropolitan Policy Program at the Brookings Institution. "They depend on how attractive a place is to people."

Lower costs do not necessarily mean more people can afford a high standard of living: The average annual wage in the Brownsville-Harlingen metro area was only $31,720 in 2010, compared with a U.S. average of $44,410, according to the U.S. Bureau of Labor Statistics. So while Harlingen's cost of living may be 18 percent lower than the U.S. average, area income is about 28 percent lower.

Harlingen also has one of the country's highest poverty rates, about 30 percent of individuals, compared with 13.5 percent nationally, according to U.S. Census Bureau's 2005 to 2009 estimates. The city's unemployment rate in April was 9.4 percent. Several other low-cost areas also had low income and high poverty rates, including nearby Brownsville, Tex., McAllen, Tex., and Cookeville, Tenn.

"What the local market can bear would have an impact [on prices]," says Dean Frutiger, project manager for C2ER. "There aren't many Nordstroms or Saks Fifth Avenues in that list of lowest-price areas."

Of course, regional variations in price result from supply and demand. High home prices in Manhattan, for example, result in part from the low level of supply relative to demand. In Harlingen, the average home price is between $100,000 and $150,000, according to data from the Real Estate Center at Texas A&M University.

Differences in prices for goods can also result from costs along the supply chain. Prices of retail goods generally include the retailer's cost of goods (the amount paid for the product plus shipping), operating expenses (overhead, payroll, marketing, and supplies), plus any additional markup. For example, supermarkets set milk prices based on competitive wholesale pricing between processors, in-store promotions, and a margin for supermarkets' operating expense and profit, according to the Northeast Organic Dairy Producers Alliance.

Which entity represents the greatest share of cost can vary by market. Operating expenses might be higher in places where labor and rent cost more, for instance. On average, farmers receive 45.9 percent of the retail price of a gallon of 2 percent milk, cooperatives 6.1 percent, wholesale processors 35.6 percent, and retailers 12.5 percent, according to a U.S. Government Accountability Office (GAO) report, citing 2000 to 2004 data. These percentages differ regionally: In Seattle, where a gallon cost an average $2.70 in that period, retailers received 44.1 percent, compared with 4.8 percent in Charlotte, N.C., where it cost $2.66.

Marketing strategies among regional retailers also play a role. For example, a retailer promoting a low-cost image might sell milk at or near cost and raise the price of other items. Those increasing profitability of dairy products might maintain high prices for milk but set lower prices for other items, according to GAO.

Labor and energy costs are also significant factors. "Alaska and Hawaii are expensive because it's expensive to ship things there," says Wial. Even gasoline prices are affected by transportation costs. The U.S. Gulf Coast is the starting point for most major gasoline pipelines, according to the U.S.Energy Information Administration, and states farther from refineries tend to have higher prices.As of June 13, the price of a gallon of gas in nearby Houston was $3.528, compared with $4.114 in Chicago, according to EIA data.

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Bill Martin, chief executive of the Harlingen Economic Development Corp., says gas prices in Texas tend to be about 10¢ lower than the U.S. average, due in part to the proximity to refineries. With a lower price for fuel, Harlingen residents' transportation costs are about 12 percent lower than the national rate, C2ER estimates.

State programs can have an effect too. California gas prices, for instance, are usually high, as drivers must use costlier reformulated gasoline, which burns cleaner. Also, if more than one refinery in the state has operating problems at the same time, supply tightens and prices can soar, or supplies must be transported from the Gulf Coast, according to the EIA.

In a gallon of gas, the price of crude oil is the largest price contributor, representing about 68 percent of the retail price, while taxes represent the second-largest chunk, about 14 percent, according to the American Petroleum Institute, a trade association.

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Wide gaps between state taxes on gas contribute to price differences among markets. The federal excise tax on gasoline is 18.4¢ per gallon. Including federal, state and local taxes, the West region has the highest average tax on gasoline, at 61.3¢ per gallon, while the South has the lowest, an average 38.5¢, according to API's May 2011 data. Among states, Alaska has the lowest average gas tax, 26.4¢ per gallon, and Connecticut has the highest, 70.3¢. Texas, at 38.4¢ per gallon, ranks 12th lowest.

Cigarettes are sensitive to state excise taxes. The rate per pack ranges from 17¢ in Missouri to $4.35 in New York, according to 2011 data from the Federation of Tax Administrators. As a result, cigarettes in Missouri cost about $3.97 per pack but $8.97 in New York, according to the Campaign for Tobacco-Free Kids.

With access to cheaper goods from milk to gas, middle-income earners in places with low costs can achieve a higher standard of living for less. The low cost of housing, transportation, and other basic expenses can be a significant advantage, but the cost of living is only one lifestyle consideration. Says Frutiger: "Quality of life is a judgment call."