Here’s why housing costs are so high

It’s a long list that includes the influx of Californians, rising construction costs and a lack of public money

California growth of population vs housing.

California growth of population vs housing.

Half the state’s households struggle to afford the roof over their heads. Homeownership—once a staple of the California dream—is at its lowest rate since World War II. Nearly 70 percent of poor Californians see the majority of their paychecks go immediately to escalating rents.

Here’s what you need to know about one of California’s most vexing issues.

Just how hard is it to buy a home?

Hard. Really hard. Both compared to how hard it is in other states, and how hard it was for previous generations of Californians to buy homes.

While it’s always been more expensive to be a homeowner in California, the gap between us and the rest of the country has grown into a chasm. The median California home is now priced 2.5 times higher than the median national home. As of 2015, the typical California home costs $437,000, easily beating the likes of Massachusetts or New York (only Hawaii had more expensive houses).

Despite relatively low mortgage rates, exploding housing prices have caused California’s homeownership rate to dip significantly. Just over half of California households own their homes—the third lowest rate in the country, and the lowest rate within the state since World War II.

It’s not just housing prices that are affecting homeownership rates. Studies have found that student debt loads, rising income inequality and changing housing preferences among younger Californians are also at play.

Rents are soaring

Rental costs across the state are some of the highest in the country. While listed housing prices dipped dramatically in the wake of the Great Recession, rents in California remained relatively stable before soaring in recent years in hot markets.

Across the state, the median rental price for a two-bedroom apartment is about $2,400, the third highest in the country. But statewide figures water down how absurd the situation is getting in urban coastal markets, where the vast majority of Californians live. The median rent for a two-bedroom apartment in San Francisco reached more than $4,000 this year.

Big business also feeling the pinch

The McKinsey Global Institute found that housing shortages cost the economy between $143 billion and $233 billion annually, not taking into account second-order costs to health, education and the environment. Much of that is due to households spending too much of their incomes on the rent or mortgage and not enough on consumer goods.

Even the attractive salaries and lavish perks of Silicon Valley struggle to overcome the local housing market, as young tech talent flees to the relatively inexpensive climes of Austin or Portland. Nearly 60 percent of Los Angeles companies in a recent University of Southern California survey said the region’s high cost of living was affecting employee retention.

How the dollars are being lost.

It won't get better anytime soon

The state estimates that it needs to build 180,000 homes annually just to keep up with projected population growth and keep prices from escalating further out of control. Unfortunately, for the past 10 years, the state has averaged less than half of that. In no year during that span did California crack the 100,000 barrier.

There’s fierce debate over how long it takes low-income residents to benefit from the construction of new market-rate housing—a renter on the wait list for housing vouchers won’t take much comfort in the luxury condos being built in downtown Oakland or Los Angeles. While California faces an affordable housing gap at nearly all but the highest income levels, the low-income housing shortage is most severe.

According to the nonpartisan Legislative Analyst’s Office, helping just the 1.7 million poorest Californians afford homes would cost $15 to $30 billion a year.

Housing can't keep up

From 2010 to 2017, the population of the state has grown 6 percent. That’s more than 2 million newly minted Californians, all with the nasty habit of wanting a place to live. Making matters worse, most are cramming themselves into our state’s large cities. In fact, 75 percent of the state’s new residents have sprouted up in urban centers with populations over 50,000 (don’t be too hard on them–that’s where most of the job growth has been).

Building new homes is expensive

Part of the problem boils down to the (literal) nuts and bolts of housing development. Over the last five years, construction costs have been ticking up across the entire country.

A labor shortage in the home building industry bears much of the blame for this. When the housing market crashed in the late 2000s, construction workers left the industry in droves. Now that prices are back at nosebleed levels, those same workers haven’t come back. Across the country, employment in the construction industry is down more than 13 percent since the height of the recession. In California, it plummeted twice that far.

Where have all the workers gone? Theories abound: tighter immigration laws, a dearth of skilled labor, the opioid epidemic, depressed wages, coddled millennials not knowing the value of a hard day’s work. Whatever the cause, it all makes it that much harder for developers to build homes on the cheap and easy.

A lack of public dollars

A little recent history: In 2012, California began unwinding its redevelopment agencies, the local investment organizations tasked with revitalizing “blighted” areas across the state. By law, redevelopment agencies were supposed to provide a guaranteed stream of cash to cities for subsidized housing—20 percent of any increase in property tax payments.

Much—in many cities, most—of that money didn’t end up going into the construction of new housing, but was instead siphoned off to pay for broadly defined “administrative activities.” Still, with the end of redevelopment came the end of the single largest source of non-federal money for affordable housing in the state. And California lawmakers never plugged that hole.

In the meantime, temporary influxes of cash from recent bond initiatives—Proposition 46 (2002) and Proposition 1C (2006)—are nearly depleted. Excluding the Low-Income Housing Tax Credit program, between 2008 and 2014, state and federal funding for affordable housing development in California has dropped by more than $1.7 billion, or 66 percent.

Does it matter? Wouldn’t simply adding more market-rate housing make all housing more affordable? Eventually. But according to one UC Berkeley study, it can take decades before new supply begins to push down rents on the cheapest places. In the meantime, it found, subsidized housing is twice as effective as new private development at allowing low-income residents to weather rising rents and stay within a region.