Phill,
I'll throw out Denver as a suggestion. In my opinion, Denver has a mild climate only occasionally interrupted by periodic heat in the summer and maybe five days to a week of truly disruptive snow in the summer. Dry air like Arizona. I deal with the snow because I have to go to work. If the two of you are retired, then sit out the occasional days of snow. It doesn't stick around for long in town. I'm from the midwest, where I characterize the winters as getting grey around October or November and finally clearing up again in May. In Denver, it could snow a foot today and be blindingly beautiful tomorrow. It's frequently the case actually.
With regard to O scale trains, for starters look to posts here on the forum by Erik Lindgren. He has over time posted about the DSMR club now removed from Union Station, as well as a new modular club group that has sprung up to fill that void. The new group meets regularly and sets up at various local shows. And the old DSMR club may yet be resurrected at a new location. In addition to these two clubs, Erik has posted about the opportunity to run trains at Tim's Trains in Louisville, a suburb located between Denver and Boulder (a town I might add that has been voted as best place to live in the U.S. at least a couple of times lately). So right there are three possibilities.
Also look up the Appalachian and Ohio layout belonging to Dave Stewart just north of Denver. The second version of the layout is currently under construction but based on the first it will no doubt be first class when finished.
For real trains, there is a somewhat busy sampling of BNSF and UP trains through town each day in all directions. There are any number of narrow gauge operations in the state as well.
I can't offer too much insight into the sewing and knitting presence around town, although I do know there is a busy quilting scene in the Golden area. I don't know if quilting counts among your wife's interests.
Money wise, I think Denver is a bit on the high side but not San Diego high. I know my rent is too much, but I expect that bubble to burst within a year or two. Of course things depend on what part of town you look to.
And lastly, Denver is home to Caboose Hobbies. What could become an honest to goodness Local Hobby Shop for you. They don't carry a large inventory of O scale on the shelves, but any number of people employed there or that frequent the store are O scalers. I see Erik and Rick there on occasion, and I believe some of the staff were part of the DSMR.
My only real current issue with Denver is that I am beginning to feel like the town is getting too big. Otherwise I love the weather and the amount of things to do outdoors within proximity to town. I'd like to have more consistent prototype train action, but it's still decent.
I suppose inviting somebody to move to Denver doesn't help with my gripe above but what the hey, what's two more people on top of the 80,000 a year already moving here.
Take a look around. I hope all this babble gives you an idea or two.
Jim
P.s. Erik's signature includes a link to the new modular club. Click here for the website for the Appalachian and Ohio.