Housing shortage biggest threat to California’s growth

Loren Kaye
President of the California Foundation for Commerce and Education

The overall California economy is humming along quite nicely, and even though we may be overdue for a turn in the business cycle, there are few indications of the threats to economic growth that usually precede a downturn.

Parts of the Bay Area and Southern California are beyond full employment, which means some California regions are creating more jobs than the labor force can support. This situation points to an inevitable threat to growth, which will be the inability to recruit a skilled labor force for the jobs being created. And the ability to maintain a skilled workforce is hamstrung by California’s housing shortage.

In a well-argued essay in Beaconomics, the publication by, yes, Beacon Economics, Economist and Executive Director of Research Robert Kleinhenz makes a compelling argument for accelerated production of market rate housing. (Full disclosure: Beacon Founding Partner Christopher Thornburg chairs the CalChamber Economic Advisory Committee.)

I have excerpted Kleinhenz’ piece generously, below, but I commend to you the essay in its entirety.

With the state at full employment, job growth and general economic gains will largely be constrained by the availability of workers. This is good for workers who might achieve pay increases in the coming months and quarters, but it poses a challenge for firms that want to grow but cannot because they are unable to hire the necessary workers…

For decades, California augmented its home-grown labor force with workers from elsewhere, drawing from both other states and other countries… There were opportunities for aerospace engineers, fruit pickers, and everything in between. In the 1970s and 1980s, California’s labor force grew by an average of 3.1% per year, during which time net migration matched or exceeded California’s internal population gains. But net migration turned negative with the 1990s recession, and in turn, growth in the labor force has slowed to just 0.9% annually since 1991. Significantly, in the last decade and a half, consistent state-to-state migration out of California has been offset only by international migration into the state.

It is no coincidence that slower labor force growth has occurred as the cost of living has soared in California. As recently as the mid-1970s, the median price of a California home was just a few thousand dollars higher than the national median. But since 1990, the California median has consistently exceeded the U.S. median by more than 50%…

Without attempting to sound trite, it all boils down to supply and demand. On the demand side, the much-anticipated arrival of Millennials on the housing scene, coupled with recent job and income growth and low interest rates, are all driving demand for housing, both owner-occupied and rent- al. On the supply side, existing home sales have fallen below expectations, given the strength of the economy, while new single-family and multi-family construction has been relatively weak since the recession.

Demand-side solutions to the problem include easier underwriting standards (though not as slack as in the 2000s), reduced down payments, and special finance programs for would be buyers, along with rent subsidies for qualified households. But in the absence of increased supply, these programs result in more would-be buyers/renters competing for scarce housing. No, the situation must ultimately be addressed by increasing supply, a tall order indeed. But until California does so, in earnest, growth of the statewide economy will be constrained.

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