Golden State Resilience: Four Considerations for California’s Housing Market

Scott Wild
Peter Dennehy photo
Dean Wehrli

Scott Wild

Peter Dennehy

Dean Wehrli

June 17, 2024

The current strength of California’s housing markets stands out and might be counterintuitive to what national news headlines want you to believe. We delve into the current realities and future signs by looking into:

  1. California’s continuing status as an economic powerhouse
  2. The persistent imbalance between housing supply and demand
  3. The factors that have allowed California to bounce back in a challenging market
  4. The future with a mix of optimism and caution about the realities of California and the housing market

California remains an economic powerhouse

California’s economic strength is a testament to its massive scale potential. As of 2023, California’s annual GDP was approximately $3.9 trillion, making it the most significant state economy in the US and the fifth-largest global economy compared to nations (just ahead of India). In April 2024, the state had a job base of 17.9 million and added 206,000 jobs from a year earlier.

California’s population growth potential is a promising factor for housing demand. As of 2023, it remains the most populous state, with 39.2 million people. While it has experienced slower population growth over the past decade than in previous decades, we see hints of that trend reversing. The state’s population grew by 67,000 in 2023 for the first time since 2020. Decreasing mortality and rebounding legal foreign immigration are the primary factors instilling hope for the Golden State’s future.

As of May 2024, the two California regions were JBREC’s top-ranked US housing regions, and Southern California led in year-over-year home value appreciation.

There is a persistent imbalance between housing supply and demand.

The new home development volume does not align with California’s population and job base. JBREC forecasts 39,000 new home sales in 2024 in the California markets we track. For context, one Texas MSA, Houston, is projected to have almost as many new home closings as California in 2024. Houston has a population of ~7.3 million (~81% smaller than California), with a projected 38,000 closings.

California markets bounced back quickly from the impact of interest rates hikes.

In areas like Orange County, San Diego, and, to a lesser extent, Sacramento, new home sales slowed as they did nationwide during the interest rate spike. But most California housing markets came roaring back, with steady price growth in 2023 and into 2024. A few things caused the quick rebound and will help sustain strength:

  • Development bottlenecks prevent overbuilding. Limited developable land remaining and notoriously long and arduous approval processes for new projects kept California builders in check from flooding the market with supply.
  • Years of undersupply create a buffer of pent-up demand. Land constraints and entitlement constraints are not new problems in California. Pent-up demand from years of persistent undersupply and historically low resale supply means these markets have no bloat.
  • International buyers are back. A long pause during pandemic-induced travel restrictions has created pent-up demand from international buyers, who again are fueling demand in the luxury home market.
  • Prices are up everywhere else—so why leave now? Few US markets feel like a bargain lately, so why uproot your life for a new state if you still struggle to afford a home that meets your needs?

Looking forward with a mix of optimism and caution

Despite population growth and affordability challenges, California remains a hub of economic activity and cultural influence. As consumers lean toward valuing overall quality of life more, many are still willing and able to pay for the desirable California lifestyle. Meanwhile, builders, developers, and municipalities face the challenge of innovating and finding creative solutions. When looking forward, we are keeping an eye on the following:

  • Affordability. At the current “crisis” levels, the dream of homeownership is becoming unattainable for most young families. This issue, ideally, also pushes municipalities to become more open to innovative housing solutions as their constituents demand action to address the housing crisis. New state laws can also streamline the entitlement process if a sufficient affordable component exists within a development.
  • Is housing undersupply a permanent condition? Despite the massive demand for housing, we don’t expect the new home supply to spike suddenly in California. The easy development projects are gone. ADUs aren’t the cure-all solution. Redevelopment of underused malls and offices could help supply, but it typically takes years to become a reality.
  • A shrinking or slowing skilled labor pool. Low- and medium-income workers who cannot afford to live in expensive areas migrate elsewhere. Look no further than the trades that local homebuilders rely on—they continue struggling to find skilled workers. For better or worse, this should lead to higher wages.
  • Companies relocating to lower-cost states. California is an expensive state in which to conduct business. Most leading firms will remain in California to tap into the rich talent pool, but some are shifting their operations to lower-cost states.

We’ll be at PCBC this week!

We look forward to meeting many industry leaders in person. Please contact us for more information about California or to discuss your project.

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About The Author

Scott Wild
Scott Wild
Senior Vice President, Consulting
Scott leads project specific consulting analyses throughout Southern California.
Peter Dennehy photo
Peter Dennehy
Senior Vice President, Consulting
Peter Dennehy is a consumer and housing industry expert with 30+ years of diverse experience in market research, product segmentation, consumer trends, real estate investing, acquisitions, and project performance evaluation/optimization. His focus is deploying actionable insights from the latest research on the ever-changing intersection of economic and demographic trends, residential product & design innovation, and consumer segmentation and preferences to develop research-driven strategies to create incredible homes and communities.
Dean Wehrli
Dean Wehrli
Dean helps housing sector clients figure out not just what might work and what might not, but why.

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