California’s Housing Costs Threaten The State’s Future

My previous blog documented California’s 2020 population loss, the first time that’s happened since the state was founded.  Billionaire Elon Musk has moved to Texas, but the biggest worry for the state is the loss of lower and middle-income residents, likely driven by California’s high housing costs.  The state must fix its housing affordability problem for a more secure future.

Some media coverage claims the losses are among the wealthy.  A Yahoo finance story claimed “millionaires and billionaires have fled California in droves,” driven not only by high taxes but “political correctness.”

But the Public Policy Institute of California shows that’s not the real problem.  Rather, the Institute finds that “California has been losing lower- and middle-income residents to other states for some time while continuing to gain higher-income adults.”

The Institute, like other analysts, sees “the state’s high cost of living, driven almost solely by comparatively high housing costs” as a major culprit in the outmigration story.  Without a bigger supply of more affordable housing, moderate income families will continue to be pushed out while new immigrants won’t be able to afford life in California.  

California’s demographic troubles were highlighted by the 2020 loss of a House seat, based on the Census, although the state’s delegation of 53 Representatives remains the nation’s largest.   We had become accustomed to California gaining seats because of population growth—from 1950 onwards the state added 29 seats as it grew to be the largest state. 


But as the Institute shows, population growth had been slowing for several decades, especially after 2000.  Although births and international migration kept the population growing, the state began to see net outmigration, with a net outmigration of around 1.2 million people during the 2010s.

The state also has gained higher educated adults.  Between 2010 and 2019, California had a gain of 154,600 adults with a college degree, while 777,400 with less than a B.A. moved out.

A primary culprit?  High housing costs.  Economists have puzzled for years how parts of California, especially the Bay Area, Silicon Valley, and Southern California continued growing while their housing prices rose inexorably.  

Between October 2012 and October 2021, the all-transactions house price index for California more than doubled, rising by 105%.  The Case-Shiller index for Los Angeles rose by 73% in that period, while the index for San Francisco skyrocketed by 140%.

And those housing costs are driven by a lack of supply.  California (like many other jurisdictions) has made it progressively harder to construct new housing, through a combination of single-family zoning, homeowner opposition to new development, and suburban resistance to allowing multi-family housing.

All of this happened while the economy was growing and jobs were being created. But new housing supply, especially multi-family and affordable housing, is essential for working families to live in a region. California, like other places, has fostered job growth while not producing enough housing to accommodate working families.

By analyzing building permits relative to job growth, analysts at Stessa ranked states on their housing production.  And between 2010 and 2020, California was the nation’s worst on this measure.  The state added 2.54 new jobs per new housing unit, so even as the economy expanded, housing prices rose faster.

Economists puzzle over how regions can grow even in the face of ever-higher housing prices.  In places like Silicon Valley, Enrico Moretti found that the continuing in-migration of highly skilled technical labor creates what he calls a “brain hub.” 

Firms need highly skilled workers, while workers seeking tech jobs are drawn to the region, allowing firms to grow, specialize, and keep expanding, luring in new workers, etc. Meanwhile, support services like research and venture capital lure entrepreneurs. Rising incomes and wealth can, for a time, support ever-rising home prices.

But that process can’t continue indefinitely, especially for lower and middle-income households.  And California’s population troubles reflect California’s years of inadequate housing development, which has disproportionately harmed people of color and lower-paid workers. But the lack of adequate housing supply may now be hamstringing the state’s entire economy.

The Tycoon Herald