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How Does the Population Affect the California Housing Market?

The laws of supply and demand have always been the first suspects when the cost of a commodity goes through the roof and few can afford it. However, when it comes to California housing, the blame doesn’t sit solely on builders and buyers going into a bidding frenzy. While both play a part, the culprits are a far larger, more diverse assortment of players that have created yet another perfect real estate storm in the state.

The California Association of Realtors, or CAR, stuck to the traditional line of supply and demand when prognosticating 2018’s housing shortage. However, in reality, the massive influx of new people came with financial baggage. They were not free and clear to buy homes outright, which would then make the supply and demand problem a simple one to solve. But they all still need a place to live. Now there is a growing generation of people who need housing but can’t afford it on their current income, are buried in debt and have no leverage, are stuck with high rents that eat up any ability to save a down payment, and are being systematically blocked out of homeownership altogether.


How Easy is it to Buy a House in California?

California is currently redefining what it means to try to buy a home in a difficult market. Compared to the rest of the country, the state is in the top five of the worst places to try to buy a home. The Golden State has never been a cheap place to reside, but since the recovery post-2009, home prices have steadily risen back to their pre-Recession levels and now exceed a median of $437,000. Most people just don’t have the money to even afford the requisite down payment to be considered for such a home. That means the typical buyer has to resort now to down-payment assistance programs which are in short supply and mean additional borrowing beyond the traditional mortgage. And those who have a home aren’t moving, many in fear of not being able to get into another home.


The Shortage

From a supply perspective alone, ignoring other existing factors that make the problem worse, California’s housing supply has never really been enough. For years in the 2000s builders held off adding more homes than absolutely necessary to keep rising prices inflated for maximum profit in sales. Instead, used homes became the substitute, setting off a hot market in private sales that kept getting crazier as folks refinanced to use equity money for additional property purchases. Then the 2009 Recession hit, and the builders were tanked. Many left the state and their idle workers went elsewhere. Flash forward to 2018; while the builders have returned, their workers did not. Blame immigration, lack of promise or tight building schedules but the workers are scarce, making the cost of building skyrocket. And that in turn translates to higher home prices on the low number of homes that actually get built.

California House Supply Vs. Population Growth

Californians are also clustered around key urban regions. It’s not as if there’s no land in the state. Drive through the southern part, especially east of Los Angeles or south of Fresno and you will see hundreds of acres of vacant land waiting to be used. Even farmers have more than what they need in the central valley. However, that’s not where the jobs are, a key factor that has always driven housing levels within proximity of income sources.

Statewide, California is drawing people in with 1.2 percent job growth, a 4.6 percent unemployment rate and dropping, and historical low housing mortgage interest being under 5 percent interest. It’s a great time to be looking for a job in the state if you can find a place to live near the jobs. Southern California alone added 830,000 new jobs in 2017, adding to the rosters of people needing a regular place to live near their work.

As mentioned earlier, one restriction to available inventory has been folks in existing homes not wanting to move out. Less turnover in this arena clearly dampens overall availability. However, building isn’t even making an effort to meet needs. Single-family homes are only expected to grow by 1 percent in 2018, a total of 426,200 properties statewide. Active listings in all major markets are pummeled by a drop of 20 to 30 percent in inventory since 2016.


Why Has Housing Production Been so Slow?

Build more, that should solve the problem, right? However, the building boom is nowhere to be seen. While there is a profusion of major industrial construction occurring and commercial expansion with roadway repair, homes are absent in the construction arena. Again, a lack of labor is a major pinch on builders. Second, everybody is hiring and pay is pretty good elsewhere, so why move back all the way to California? Finally, a lot of the labor was foreign workers, and the current immigration restrictions are not helping matters at all. So, without a new building frenzy, the pricing on the existing stock starts to go through the ceiling.


How many Homes are Needed to Keep Pace?

The current rate of population growth in California is estimated to need at least 180,000 new homes annually to keep price levels at an affordable level for most economic classes. In reality, in-state builders have only produced maybe 90,000 in a good year. And for the last decade there has never been an annual cycle where the inventory growth was above 100,000 new homes. That creates pressurized demand that keeps growing year by year.


How Does This Affect the Housing Market?

Clearly the more people who want to buy a home, the higher the price will go since it is an open market subject to bidding. Real estate agents are doing their part to keep the frenzy alive since they have a vested interest in higher commissions. And lenders stand to earn greater interest profits on larger loans. The market is simply not geared to going in the opposite direction with short supply present. But what is really irksome is that where people need to live, land use planning is focusing on projects involving luxury condos versus new family housing divisions. While there’s a housing inventory glut at the high income level, the average wage earner is getting shut out more and more by cost alone.


High Cost & Limited Affordability

It has not helped that the average income earned is not keeping pace with the rise in home prices. While minimum wage is higher than other states, and average income in California is well above that of other states, even two paychecks in a household are oftentimes not enough to even be considered for a home loan today. Home prices have simply gone too high too fast, and that reduces available inventory to HUD homes and properties far from job sites. It’s normal now to hear of someone making a two or three-hour drive commute to get to work and back daily just to afford a home. And for those who can’t do a long drive, the alternative option of renting is disappearing as well with skyrocketing rental prices. San Jose residents, for example, are looking at 40 percent of their income going to rent alone.


What Areas of California Have Been Affected the Most?

The densest areas of the state, and also the places with the most job opportunity, have been impacted the worst. The Los Angeles Basin, the Bay Area, and San Diego are almost impossible to buy a home in for most people today. That said, far milder markets like Redding and Sacramento are seeing a real estate rush pushing properties there well into the $350,000 median range as well, again not cheap by any means. And while there is plenty of land in places like Susanville or the far eastern side of Kern, one pretty much has to be ready to drive for hours to be near any kind of reasonable work to live on. So they are non-viable alternatives for many coming into the state for work and home ownership.


In Light of This, What Are People’s Options?

The options for folks in 2018 and forward are hard and lean. If one is going to buy a home in the hot markets, one has to be ready to bid fast and put hard cash down. Many folks are buying sight unseen simply to lock a property and get in, period.

Alternatively, many are looking farther out into what used to be rural areas and farm towns, but that means having an extremely reliable car and being willing to drive hours and hundreds of miles every day. It’s not the life for many who want to be closer to their resources.

Many young adults are waiting it out hoping another crash occurs soon and they have an opportunity to get in. But what happens if the market never drops? Then people have to consider potentially leaving California altogether for a chance. Relocation is now becoming a serious conversation and action for many in their 20s and 30s.


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