An interesting report came across my desk (actually, my computer’s desktop!) the other day, and I thought the information warranted sharing.
The report, California’s High Housing Costs; Causes and Consequences” was produced by LAO, the Legislative Analyst Office in our Golden State. I’ll interpret and summarize their key findings as they pertain to residential real estate here, especially in the greater Sacramento region
If you live just about anywhere in California, then it comes as no revelation that it’s pretty expensive to live here. And while Sacramento has long been considered a haven of moderate prices, especially compared to San Francisco and the Bay Area, we’ve seen prices grow commiserate with California’s other major cities in the last few years.
So, this LAO report begs the question, “What has caused housing prices to increase so quickly over the past several decades?” as well as “What are the consequences of California’s high housing costs?”
First, the state of home prices in our home state:
In fact, out of all fifty states, the average home price is more in California than only one other state, Hawaii. So, another way to think about it is that Cali leads the continental U.S. for real estate values.
Across the U.S., residential land is valued at about $20,000 per acre on average. But in California’s coastal markets, lots go for an average $150,000, and in the priciest areas like San Francisco, average $400,000 per acre and up!
In fact, in general over the last few years and even decades, California residential real estate prices are typically more than double U.S. average home prices.
But renting a home instead of buying brings no financial relief, as renters in California pay an average of 50 percent more for rent than the national average.
Why is housing in California so expensive?
There are four chief reasons for California’s high cost of housing:
1. Higher demand
2. Lower rate of building new housing
3. Demand to live in coastal areas
4. Higher cost to build in California (materials, labor, and permits)
California home prices in historical context:
It’s also no passing fad, such as an anomaly as the market finds its equilibrium after the real estate crash and recession of the mid-2000s.
For instance, California’s housing prices and rents have gone up at a higher rate than the U.S. average since 1940! Back in the ‘40s, the average house in California home cost about 20 percent than the typical home price across the U.S. However, with the massive population influx when the troops came home and settled into the suburbs post World War II, the demand far outpaced supply.
By the end of the 1940s, California home prices were 30 percent higher than the national average. It’s not a given that prices in this state will rise faster than normal, however, as from the 1950s to 1970s, California home prices followed in line with national averages.
But the 1970s saw a quickening and by 1980, California’s average home price was a robust 80 percent higher than national averages! That was just a sign of things to come, as steady exponential growth in home prices came to the point that by 2010, the average California residential dwelling was 200% more than the national average.
What would have helped keep California’s home prices low?
The LAO report also crunches the data to determine what would have needed to happen in order for California housing costs to remain stable with national levels.
They found that between 1980 (when prices really started to skyrocket) and 2010, the state needed:
70,000 – 110,000 additional new housing units every single year.
New home building would particularly need to be concentrated in coastal areas,
With more housing densely concentrated in central cities.
They estimate that during that 30-year span, California needed about 190,000 – 230,000 new housing units per year to keep costs at national averages, but only about 120,000 per year were actually added, accounting for the shortfall and increased demand that led to higher prices.
But here’s the Catch-22: if we did see 230,000 new housing units per year (instead of 120,000 we had), the state’s population would now be measurably higher, too. In fact, the LAO report estimates that at that rate of new housing, there would be about 7 million more residents in California today, and San Francisco’s population would be about 1.7 million instead of their current 800,000!
Wide spectrum of housing costs within CA
Speaking of San Francisco, one unique characteristic to California is the high demand- and cost – of coastal living. In fact, home prices in the highest metro areas in CA (San Francisco/San Jose) are six times as high as the lowest metro area (Bakersfield).
The average rent in the Bay Area is also about three times that of the lowest average rents in the state in Bakersfield or Fresno.
The desire to live in California’s coastal cities in rampant, with about two-thirds of the state’s population now living in the major coastal metro areas of Los Angeles, Oakland, San Diego, San Francisco, San Jose, and Santa Ana-Anaheim.
But even the least desirable and lowest-priced areas of California see housing costs higher than the nation’s average!
What’s the real economic impact of these sky-high housing costs in California?
According to this LAO study, California residents feel the impact of these high housing costs in at least 5 major ways:
1. Spend a larger share of income on housing (at least 4% to 10% more on average).
2. Homeownership rates tend to be lower – and we buy later in life.
3. Housing density and household density are more crowded.
4. We commute further to work each day (and it takes longer) than national averages.
5. Many people choose to work from home, telecommute, or live in one city/community and work elsewhere.
What this means for Sacramento:
Although not specifically mentioned in the LAO report, Sacramento is in an envious position as property prices have traditionally been closer to other inland communities as opposed to high-cost areas like San Francisco.
And while Sacramento’s infrastructure, job base, local economy, and downtown development have seen the capital city grow leaps and bounds in the last few years (reflected in the rising real estate and rental prices), Sacramento is still a great place to live, work, and invest – and relatively affordable.