What Is Causing The Housing Crisis In California?

California has been experiencing a severe housing crisis since the 1970s, which is still having an impact on the market today. The median house price in California has now reached $533,500, more than double the national average. The state is also home to four of the most expensive residential markets in the country: Silicon Valley, San Diego, Orange County, and San Francisco.

At the same time, California also has one of the highest poverty rates. It makes up at least 12% of the US population, but a quarter of the population is homeless or unemployed. The cause of this crisis is an imbalance between demand and available supply that has been taking place for decades; economic growth created thousands of jobs but the construction of new and affordable housing units thus far has been insufficient to meet the demand.

What Caused The California House Crisis?

A combination of factors led to the origin of the housing crisis in California, from bad laws surrounding zoning to outdated tax provisions that have created the housing shortage we think is “normal” for California today. Slow reactions to making necessary regulatory changes by the government have caused the crisis to reach a critical point for both lawmakers and native Californians.

The only possible solution would be to construct millions of new, affordable properties in the next few years, a daunting task. The firm McKinsey & Co. estimated in 2016 that 3.5 million properties would have to be constructed by the middle of the 2020s to meet the demand.

However, more recent analyses suggest that it may take until 2050 to realistically reach this goal.

Unsustainable Pressure On The Middle Class

In California, over 40% of residents pay more than 30% of their income on their housing, and the high average property price has rejected the middle class. More recently, this has caused lower-income as well as middle-class families to leave California for more affordable states and housing elsewhere. Now it’s only the educated, high earners that remain – causing serious housing gentrification throughout the state.

Tech giants like Apple and Facebook have pledged $4.5 billion towards building more affordable housing options in California to lessen the impact of the crisis, but have since outsourced hiring to other locations and made the decisions to move their headquarters to other cities for the purposes of continued growth. These are also the very same companies that have been blamed for contributing to the crisis in the past by bringing in large groups of workers over the past decade and flooding a market with already-low housing supply.

The Gentrification Of Housing

The gentrification of housing takes place when a city neighborhood rapidly goes from low to high value, often forcing people out due to the lack of affordability. This value increase causes the displacement of original residents as they get priced out of their neighborhoods and become unable to sustain the local cost of living. Gentrification also leads to richer individuals living in places with more attractive geographies.

As a secondary result of gentrification, undesirable geographies which are often polluted and high in unemployment, become home to the most impoverished and marginalized communities. According to the U.S. Department of Health and Human Services (HHS) Centers for Disease Control and Prevention (CDC), vulnerable segments of the population are at increased risk for the negative health effects of gentrification. This is now the case for the middle and lower classes in California.

The Problem With Flipping Houses In California

Flipping in California has played a significant role as an aggravating factor in gentrification since the early 2000s. During the peak of the housing bubble in 2008, nearly two-thirds of all home flips nationwide were financed using loans. Flippers would purchase properties in California to capitalize on the tech employment boom, renovate them and then resell them for double the price just four months later pricing many buyers out of the market completely.

It has been found that it was investors who had taken out mortgages on multiple properties that defaulted at the highest rates during this time. The trickle-down effect of this is that even today, many of the top metros in California are in the midst of a bubble at risk of bursting. To solve this problem today, there has to be an allowance for new construction somewhere, despite the changes this will bring, but with a renewed focus on affordability and multi-family properties.

Final Thoughts

The housing shortage in California has multiple negative effects on buyers: only a small portion of the population can really afford a median-priced home, while others are forced to leave the state to look for more affordable pastures. The house crisis in California is coming to a peak and swift action will need to be taken to reverse the damage that has already been done.

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