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High Housing Costs Holding Back California Economy Study Says

High Housing Costs Holding Back California Economy, Study Says

California has some the most expensive housing prices in the U.S., a metric that could be keeping the state’s vibrant economy — already the world’s eighth largest — from reaching its full potential.GoldenStateFlag

In a recent report, the California Association of Realtors (CAR) examined the housing affordability issues facing Golden State residents, particularly in the heavily populated coastal metro areas – including the causes and consequences. As of January, CAR says that the median home value in the Golden State was $437,000, second highest in the country behind Hawaii and more than double the national property value of $179,000.

Homebuyers in the Bay Area must contend with even bigger stakes. With a median value of $952,000, homes in San Francisco cost more than five times as much as they do in the U.S. as a whole. Homes in San Jose sell for about four times the national median, while those in Oakland go for more than three times the national median.


The primary factor causing price escalation, according to CAR, is that demand in highly desirable coastal areas of the state has outpaced construction over the past three decades. Between 1980 and 2010, CAR says that housing supply in the typical U.S. metro area increased by 54 percent, while it grew by 32 percent in coastal California. In San Francisco, housing stock increased by only 20 percent in that time period.

Rising home prices and rents should typically spur an uptick in activity by housing developers, but that has not happened in coastal California, due to variables such as land shortages, resistance from homeowners concerned about their property values, and environmental reviews that can limit construction. Over the past two decades, housing stock in San Francisco and San Jose grew by 0.7 percent each year, half the rate of Seattle, which CAR compares with the Bay Area because of its coastal location, temperate climate, and thriving economy.


Coastal California’s lack of affordability is keeping more people from moving to both the state and the Bay Area, according to CAR. The organization estimates that if California had added 210,000 new units annually over the past three decades instead of 120,000, the state’s population would now have 7 million more people than it does today. Had that construction occurred, San Francisco would have a population of 1.7 million – more than double its current number of residents.

As a result, CAR says that businesses located in coastal California could find it challenging to recruit and retain qualified employees who are put off by high housing costs. Citing results from a 2014 survey, the report says that 72 percent of Silicon Valley executives named housing costs for workers as the most important challenge facing companies in the region. Since businesses and employees in large, urban areas tend to be more productive, those priced out of such places help to slow overall economic growth.

With many metro areas seeing growth in technology jobs and competitive wages, a recent Gallup poll indicates that some tech workers may already be bypassing the pricey Bay Area for more economical places like Salt Lake City and Austin, Texas, two areas the company gave its highest Job Creation Index score, 37, for 2014. (The San Francisco-Oakland-Hawyard metro tied for No. 2 in the U.S. for job growth on the index, with a score of 36, while the San Jose-Sunnyvale-Santa Clara region tied for third with a score of 35.)


So what can be done to increase affordability across the state? CAR’s report recommends that the California legislature take a few initial steps, beginning with focusing on changes necessary to promote dense housing construction in coastal areas of the state. It also suggests that lawmakers re-examine major policies, including those surrounding land use, and consider how affordable housing programs could supplement construction by assisting those most in need of a roof over their head.

Whatever transpires, CAR notes that intense demand for coastal California housing and a limited amount of land on which to develop homes — both seemingly natural occurrences — mean that large home and rent prices aren’t likely to disappear any time soon.

(Photo: Flickr/Druh Scoff)