You have probably heard it dozens of times in the last year: the current residential real estate market is a seller’s market, and communities all over the country are seeing so much demand that builders can hardly keep up. California, unfortunately, is seeing some of the worst in the current explosion of prices. For many Californians, the most recent burst in demand and shortage of affordable housing feels sudden, but a deep dive into the last 15 years or so reveals that the current scarcity is actually the inevitable result of years of too little building and underinvestment.
The Shortage: A Long Time in The Making
Writing for Inman.com, Libertina Brandt traces the confluence of factors that resulted in the current housing shortage back to the 2008 recession. Since the 2008 recession, when construction jobs were cut in masse, she explains, builders have not been keeping up with demand, and the record-low interest rates of the last year have hit an under-prepared industry that was unable to react quickly enough to rising demand among new home buyers. The inevitable result of skyrocketing demand and largely static inventory, as Brandt writes, is impressive: “In April, the median existing-home sales price [in California] rose by 19.1 percent year over year to $341,600, a record high.” Of course, it takes a long time to hire workers, plan construction, and build housing. The federal reserve, however, can lower interest rates at the drop of a hat. Builders have been unable to pivot quickly enough to the evolving demand for homes! Of course, these kinds of crises are complicated, and myriad other social trends have also contributed to the current situation.
Overall, specialists in the industry are calling 2021 “the perfect storm” for a housing shortage, and here’s what they mean: On the one hand, the way that seniors view their golden years is changing, and “aging in place” has supplanted the typical move to a senior living community as the preferred method for spending one’s final decades. This means fewer homes re-enter the market than usually would as homeowners age, and the effect is a substantial one; In fact, Ryan Lundquist of the Sacramento Appraisal Blog reports that “owners are staying in their homes an average of thirteen years instead of eight years.” At the same time, the millennial generation, who benefited heavily from stimulus spending, work-from-home policies, and the growing savings accounts that the pandemic facilitated, has reached the age and financial stability necessary to buy a home. Naturally, their growing demand further drives up prices.
Lastly, the CARES act rescued millions of Americans from despair by placing a moratorium on evictions and foreclosures. One side effect of that financial aid is that more people were able to hold onto their homes rather than being forced to sell them as they typically would have been. Combine the rising demand by millennials, the lower supply due to aging in place, 15 years of under-building due to financial setbacks, and historically low interest rates, and what do you get? A recipe for sky-high prices and a shortage of housing.
A Possible Solution?
So what makes the crisis so bad in California, specifically, if the whole country is experiencing a housing shortage? One writer at the Cato Institute — Michael Tanner — points to “government regulations that drive up the costs of production” in California. The shortage impacts California uniquely, Tanner writes, pointing out that “California has fewer housing units per capita than any other state except Utah,” a difficult truth that even the governor has echoed. Tanner admits to one silver lining: bigger cities, like San Francisco and Los Angeles saw temporarily lowered rent costs as more employees were able to work remotely and move away from major urban areas where their office jobs required them to live. Lower rent means more affordable living for low-income families, which is a good thing for the state. Unfortunately, the bigger picture is still ugly: “Rents in California still remain much higher than elsewhere in the country.” Tanner suggests an obvious solution that seems difficult to accomplish. It is the simple law of supply and demand: Building more homes will lower costs for both buyers and renters.
Tanner is likely right that the solution to high housing costs is simply building more housing, but the state has a long way to go. Groups like The McKinsey Global Institute have put the issue under a microscope. While they report that California is a whopping 3.5 million homes short of what it needs, they also see a path toward meeting that goal. They hope that by working with local governments in the state, changing building laws, speeding up the process for land-use approval, and adopting innovative tools like modular construction, the housing gap is a surmountable challenge that can be overcome. If California can rise to that challenge, the benefits will be enormous; there is the obvious improvement in quality of life for millions of Californians, but there is also an economic incentive: The McKinsey Institute calculates that “California’s housing shortage costs the state more than $140 billion per year in lost economic output, including lost construction investment as well as foregone consumption of goods and services because Californians spend so much of their income on housing.” That is valuable revenue that could be regained and pumped back into the state economy in a future with more housing.
An Uncertain Future
The federal reserve, concerned about rising inflation, is planning to raise interest rates, but their current target date for that move is not until 2023 — though it could change. The increased rates may curb some of the housing demand as borrowing money gets more expensive for banks and buyers, but with the Biden administration poised to extend the federal moratorium on eviction by yet another month, the inflated prices aren’t going anywhere terribly soon.
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