California is the third largest state by physical size, behind only Alaska and Texas, at about 163,695 square miles. You could fit about two Kansases or four West Virginias in the state. You might think with all this room to build, housing should be more affordable. Unfortunately, it doesn’t work that way.
Demand outstrips supply, and prices increase. If this were an economics class, housing developers would be busy creating more new housing to take advantage of the surplus of buyers, increasing supply, and eventually, prices would level out. But this isn’t ECON 101. It’s California.
How Do High Housing Costs Affect California?
California’s housing shortage costs the economy between $143 billion and $233 billion annually, according to the McKinsey Global Institute, without considering the related costs to education, health, and the environment. Much of the cost is as more money is spent on housing, less is available for consumer goods, eating out, vacations, or retirement savings.
Almost 60% of Los Angeles companies responding to a recent University of Southern California survey stated the area’s high cost of living affects employee retention. While California’s population grew by 0.9% in 2014, it shrank by 0.7% in 2021.
In 2019, more than 653,000 Californians moved to another state. At the same time, about 480,000 people moved here from elsewhere, according to the New York Times. Many Californians went to states with lower living costs, including Texas, Arizona, Nevada, Washington, and Oregon.
How Much More Expensive are California Homes Compared to Those in the Rest of the US?
The average home sale in the US in the third quarter of last year was $542,900, according to the Federal Reserve Bank of St. Louis. The average California home sale price last November was $736,300, according to the real estate company Redfin. That’s down from an April high of $844,000.
Whether it’s California or the country, housing prices vary widely depending on the location and other factors, but these are the averages. Even the estimates of housing prices differ based on who’s doing the research.
What’s Driving the High Cost of California’s Housing?
More demand than supply, plus other issues.
California’s population grew by about 6.7% over the past ten years, while new housing grew by only 4.8%. CalMatters reports that the total number of units built has gone from a little over 200,000 in 2005 to just over 100,000 in 2019. Over that time, the number of multi-family units has stayed about the same, and the number of single-family homes built has decreased by more than half.
On average, construction costs have gone up $44 per square foot in 2018 from ten years prior (in the Bay Area it went up $81 per square foot). In addition to the demand for housing, CalMatters states costs are driven by:
- The cost of land
- More expensive materials
- A labor shortage (permitted units increased 430% between 2009 and 2018 while the number of construction-related workers went up 32%)
- Local residents’ objections to new developments and housing
There is also a thicket of state and local laws and regulations that increase the cost of building new units.
Can Changing California Laws Make Housing More Available and Less Expensive?
If you wiped out land use rules, building codes, environmental laws and eliminated the ability of local governments to control housing, there would be more housing and lower prices. But there’s no free lunch. Decreasing the safety of buildings and harming the environment would result in other costs increasing elsewhere.
Eight years ago, the state legislature’s Analysts Office published its findings after looking at the issue of affordable housing. They stated:
On top of the 100,000 to 140,000 housing units California is currently expected to build, our analysis suggests that the state probably would have to build as many as 100,000 additional units annually—almost exclusively in its coastal communities—to seriously mitigate the state’s problems with housing affordability. Adding this many new homes, however, could place strains on the state’s infrastructure and natural resources…Much can be done by state and local governments to promote additional housing construction and therefore slow down growth in home prices and rents going forward. Some factors, however, such as high demand to live in the state and natural limitations on developable land, largely are beyond the control of policy makers. As a result, home prices and rents in California likely will remain above–average for the foreseeable future, even if public policies highly favorable to new housing construction were instituted that slowed future growth in housing costs.
Although laws are part of the problem, there are many other pieces to California’s affordable housing puzzle.
Please call our office if you have any questions about real estate law or need legal representation. We can advise you about how the law may be applied and what you can do to protect your rights and interests.
