California is a great place to live — if you can afford the housing costs.
For every four new California residents arriving between 2010 and 2016, only one new housing unit has been constructed, according to Redfin. For comparison, most states are still falling behind growth, with roughly two new housing units built for every four new residents.
Some of this reduced construction activity is due to builders slowing down after the overbuilding that took place during the Millennium Boom. In some areas of the U.S., builders have no reason to build at a normal pace since the population is still absorbing the excess new units built during the Boom years. But California homebuyers and renters long ago absorbed any excess construction.
It’s true, during the Millennium Boom, more homes were built than needed based on household formation. In total, from 2000 to 2007, an excess of 338,000 new housing units were built in California.
But looking at the bigger picture, this brief spurt during which construction outpaced population growth is overshadowed by many more years of relatively “negative” construction numbers. In total, from 1981 to 2016, household growth has exceeded new housing units in by 335,000 households (including those Millennium Boom years).
Editor’s note — Since an individual or family needs a place to live to be counted as a household, the basic household-to-construction ratio is insufficient to count true demand for new housing. Therefore, to compare construction growth with what is necessary to meet population growth, first tuesday used Census data to estimate the number of would-be households — based on population growth and California’s average household size — compared to new housing units. This number is reflected in the chart above.
Chart update 01/30/18
Worse, much of today’s new construction is concentrated in the high tier. Thus, new home growth is occurring beyond reach of most first-time homebuyers, who typically purchase starter homes in the low or mid tier.
For example, in Los Angeles the premium paid for a new home has steadily increased in recent years, according to Redfin. In 2011, the difference between an average existing home and an average new construction was $225,500. In 2017, the difference was more than twice that, at $485,750.
In San Jose, the difference between the average existing home resale and new construction has jumped from $328,000 in 2011 to an astonishing $752,500 in 2017.
The result is a steeper burden on households of the lower- and middle-income classes.
With new homes falling sharply behind population growth, the supply-and-demand imbalance continues to grow. Homebuyers and renters are paying more of their paycheck for the same type of housing, causing problems for local economics and the housing market at large.
To solve this imbalance, the solution is ultimately more new construction — specifically, more construction in the low- and mid-tier markets. This will be brought about through:
- looser zoning restrictions in dense areas like Los Angeles and San Jose;
- builder incentives for building low- and mid-tier housing; and
- decreasing the wait time for permitting to ensure a more efficient and less costly building process.