The Housing Crisis is Smothering the California Dream

My One Chart

In response to my last post, my buddy posed the question, “what would your top chart or indicator be to track the status of the California Dream?”

In response, I present you with my top chart - the residential population of California.

Look at that line. Steady, continuous growth that accelerates after WWII. It slows down in the 2010’s, and in 2020 is now reversing for the first time in recorded history.

The reason I picked the population chart is simple. At the end of the day, underneath all the other indicators and charts tracking social and economic well-being, the ultimate vote of confidence people give to a region or state is whether or not they choose to live there. For decades, California was the place where you moved to find opportunity. That is no longer true, and until we fix our housing crisis, people will keep packing up and moving east.

The Rent is Too Damn High

Population is more a symptom, not a cause. The chart doesn’t tell you why people are leaving, but thankfully those people tell you if you ask them their motivation.

Surveys show that in the last 10 years, people leaving the state have blamed the cost of housing as their main reason. Housing is far and away the leader, cited nearly as much as the following two reasons (family and jobs) combined.

The roots of California’s housing crisis are well-known and well-documented: California refuses to build enough housing units. This restricts supply to less than what people demand, which in turn causes prices to skyrocket.

While tracing the roots of high housing costs and the YIMBY reforms required to fix it go beyond the scope of this post, I can not talk about the future of California without first talking about how housing is smothering the California Dream.

Until California begins building enough housing, the state will fail to fulfill its potential as the land of economic opportunity.

For decades, people have wanted to find opportunity in California, but as a result of our housing shortage that demand is starting to reverse.

Rising housing prices makes everyone worse off, but it hurts low-income and working-class families the most. While the state’s overall population shrank for the first time in 2020, low and middle-income families have been fleeing for years. They are the canaries in the coal mine, seeking a more affordable state long-before the state’s population loss made headlines.

Then, when the pandemic hit in 2020, even high-income families jumped at the chance to leave when they were able. When COVID forced companies to offer remote work, high-income families saw a chance to keep their California income without paying California home prices and chose to hit the road.

No one is exempt from the housing crisis. It pushes low-income Californians into homelessness and forces everyone into a lower-quality of life. It is a main reason we have the highest poverty rates in the nation. At the same time it hurts people’s pocketbooks, it also limits the state’s potential for future growth.

Housing Affects Everything

Some friends of mine recently moved here from Texas. Upon arrival, one of their colleagues said, “prepare to feel poor.” These were people with two high-paying jobs, but that warning has proven true. The rent an old unit, barely big enough for a young family of 3 with pets, and moving here has required a downgrade in lifestyle from how their life looked in Austin.

The thing about the housing crisis is that it infects everything, not just high rents and mortgage payments. While those alone should be enough to inspire reform, constrained housing supply makes society poorer in others ways.

This idea is best captured in, “The Housing Theory of Everything” (HTOE). This is the idea that housing crises comes with painful second-order effects that slow economic growth and create material scarcity.

A simple example is childcare, which any young family will tell you is a horrifically expensive service. High housing costs makes childcare more expensive. It means the childcare facility has to pay higher rents to operate. It means they have to pay higher labor costs to offer employees a living wage so that they can pay their rent.

Multiply this out across the economy and you start to realize high housing makes all the goods and services you consume more expensive, making people like my Texas friends feel much poorer when they moved here.

The HTOE argues housing not only makes the things we pay for more expensive, it also hurts society by:

• Lowering economic productivity. People are restricted from living in areas with the most valuable, productive jobs, limiting the positive benefits of connecting people with better work opportunities.

• Slowing the pace of innovation. Innovation happens when smart and creative people interact with one another, typically in cities, to share ideas and start new ventures and intellectual movements. Unaffordable cities stops this process.

• Worsening inequality. High housing costs benefits wealthy people who already own land and increases rents for those who don’t.

• Limiting family formation. Kids are expensive, and astronomical rent and daycare costs cause people to delay having kids or even have fewer kids than they might have in a lower-cost area.

High housing costs are a tapeworm in California’s gut, quietly draining the state of vitality and stunting our growth. Addressing the housing crisis is about more than just affordability, it is about unlocking the potential of the state and its people. Right now California is running with a weighted vest on, but if we can improve housing, we can improve people’s quality of life and accelerate our growth.

Like Gas on a Flame

Building more housing is the highest impact lever we can pull to create abundant prosperity, but it isn’t a silver bullet. While California struggles from a lack of housing supply, wide swaths of the country struggle from a lack of housing demand and population declines. Look at other state where housing is cheaper. Families can afford a house in the Topeka, that doesn’t instantly turn it into a hub of global opportunity. Abundance requires a potent blend of things like innovative industry, public infrastructure, research and education institutions, and cultural openness.

What gives me hope is that the California flame still burns despite our self-sabotage. California still has most of what it needs. We remain home to the world’s most advanced tech firms and research institutions, and our state still fosters a culture that celebrates bold risk-takers. This remains true even as we actively hold our state back by refusing to build.

Solving the housing crisis won’t be easy, but if we can do it we can pour gas on the flame and once again be the place of opportunity. A greater California future is possible. We just have to build it.