California’s high cost of living outweighs local incomes

California’s high cost of living is a well-known challenge to residents. High gas prices, food prices and of course high home and rent prices all eat away at each resident’s paycheck.

These high costs are a trade-off for the superior quality of amenities available in the Golden State, including:

a year-round pleasant climate;
unique coastal and mountainous geography;
a diverse population of residents attracting people from all over the world;
top-tier public college and university systems; and
access to jobs in high-paying and quickly growing industries.

Along with these quality jobs, the average household income is higher here in California compared to the rest of the nation. This goes a small way toward making up the difference — but it doesn’t go far enough.

The Federal Reserve Bank of St. Louis recently released a Cost of Living Calculator to help residents compare incomes across states. The confusion their calculator attempts to regulate is that the average cost of living varies across states, meaning a resident’s paycheck goes further depending on where they live.

The average household income in California is $71,800, significantly higher than the U.S. average household income of $60,300. However, California’s adjusted household income — which takes into account the state’s high cost of living, the fourth highest in the nation — is just $59,000. Thus, when considered alongside the state’s high cost of living, the average California household actually earns less than the U.S. average.

Zooming in to the local level, this adjusted household income varies across the state.

For example, if you currently live in San Francisco but are considering a move to Sacramento, you know that the cost of living will be lower in Sacramento, but aren’t sure by how much. Using the Cost of Living Calculator, you will find out a household earning $100,000 annually in San Francisco only needs to earn $79,700 in Sacramento to maintain the same standard of living.

Or, if you are moving the opposite direction and currently earn $100,000 in Sacramento, the calculator will tell you that you’ll need to earn an additional $25,000 a year to maintain your same standard of living in San Francisco.

High rents, home prices contribute to high cost of living

This calculator has obvious practical use for renters and sellers who are thinking about moving to another part of the state or country. It takes the guesswork out of how much they will need to earn and budget for rent and other goods and services.

But the calculator also sheds light on a big issue for California — nearly everywhere you travel, it’s significantly more expensive here compared to other states.

While the high cost of goods and services plays a role, the biggest expense comes from high home prices and rents. The culprit behind high housing costs is a lack of residential construction, essentially a supply-and-demand imbalance.

In 2018, 116,400 housing units were started, consisting of a mix of single family residential (SFR) and multi-family starts. While a slight increase over the previous year, this number is 31% below the state’s historical construction average. In fact, construction has lagged behind the state’s historical average for the past three decades.

Meanwhile, the number of households continues to increase each year, leading to low homeowner and rental vacancy rates. With relatively few options available, landlords and sellers find they are able to ask for more money, amounts many renters and homeowners are willing to spend to get into the homes they want.

To increase the supply of homes, more residential construction is needed. This can be done at the state and local levels by lifting zoning restrictions for things that limit growth, such as:

density;
parking restrictions;
building height; and
extensive permitting requirements.

Allowing for more construction will help builders organically meet demand from new residents and young adults forming their first households. When enough homes exist to meet this demand, rents and home prices will remain within reach of more Californians, bringing the state’s cost of living closer in line with the rest of the U.S.

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