When you think of Compton, the high cost of living probably doesn’t come to mind. But it should.
Turns out that being poor is expensive. Everything from a loaf of bread to a mortgage costs more in Hub City than in more plush areas of Los Angeles, like Manhattan Beach or Beverly Hills, even though nearly one out of every three people in Compton lives below the poverty line.
Take a drive down Compton Boulevard and you can see some of these higher prices in storefront windows. But you won’t see many banks. According to research I did for a Brookings Institution study of poverty, where cities like Manhattan Beach have roughly one bank for every 4,000 residents, Compton only has one for every 25,000. Instead, it has hundreds of alternative financial services—mostly absent from wealthy areas of Los Angeles—that charge jaw-dropping prices. Cashing checks, for instance, costs 3% or more of the check’s value. And customers who take out a short-term loan can be hit with an annual percentage rate of 400% or more—a rate estimated to be more than 35 times higher than the average credit card rate in California.
It’s not just basic banking products that cost more in Compton, though. Instead of large, modern grocery stores, there are more than 200 tiny bodegas, which generally charge higher prices. And insurance is more expensive too. Insuring a car in Compton cost $400 more every year, on average, than in wealthier places.
But probably the priciest thing to buy in Compton these days is a house. That’s ironic because even though the median home value is 40% cheaper than the Los Angeles county median, Compton home-buyers pay some of the steepest prices for mortgages. In fact, more than 20% of recent home-buyers bought what the Federal Reserve defines as “high-cost” mortgages (usually at least 3 percentage points above the prime rate). Compare that to Manhattan Beach, where about 3% of the mortgages were considered “high cost.” The counterintuitive bottom line is that living in Compton often means paying hundreds, sometimes thousands of dollars more than better-off neighbors for basic necessities.
Outrage at the “gouging” of poor consumers would, in some cases, be appropriate. But higher prices also reflect the real higher costs that businesses face in Compton. For instance, Compton residents have less money to deposit in interest-bearing accounts (the ones banks make money on). That means banks cannot profitably (and responsibly) operate branches in some of these neighborhoods. Similarly, lower-income families miss more bill payments than higher-income families, which means they look like riskier customers for loans and insurance. The costs of those higher risks are passed on in the form of higher prices.
At the same time, numerous surveys by the Federal Reserve, the Government Accountability Office and the Consumer Federation of America find that lower-income consumers do less comparative shopping than higher-income consumers, opening the door for unscrupulous businesses.
To bring down these higher prices, leaders cannot look for a silver bullet. Mainstream businesses need to be given incentives to move into lower-income neighborhoods, unscrupulous businesses need to be weeded out of the marketplace and consumers need to be given the education necessary to make savvy financial decisions.
Other communities facing similar situations have launched initiatives to help solve these problems. For example, New York spurred the opening of 26 new bank branches in lower-income neighborhoods by supplementing consumer deposits in these areas with state treasury deposits. And nearly a dozen states and cities have curbed the development of high-priced alternative financial service companies like check cashers and payday lenders.
That means leaders in Compton and elsewhere can bring down higher prices for lower-income families. The poor do not need to pay more.
It’s up to the city to soften the blow of runaway incomes and housing prices so the city doesn’t, in a sense, lose its identity as a progressive and diverse place — that’s part of what makes San Francisco successful.