What’s Driving California Housing Prices Up?

Nine out of 10 of the most expensive cities in the US are located in California. The median home price in California currently sits at $468,330, compared to $213,800 nationwide.

Housing prices in California have long been higher than most other states in the US, and the gap just seems to be getting bigger. Unfortunately, that’s driving many blue-collar and middle-class residents out of the state.

Californians are more likely to spend a bigger chunk of their income on housing compared to any other state in the US.

We all know that the Golden State is a desirable place to live. The climate and physical landscape are enough to attract anyone. But other states lure residents for similar reasons. What exactly is causing housing prices in California to spike and remain as high as they are?


Lack of Supply

The housing market in California is certainly a hot one. And the shorter the supply of homes listed for sale, the greater the demand; and vice versa.

There’s just not enough available housing in the state to keep housing prices within an affordable range.

The California Association of Realtors (CAR) says the low supply is partly a result of homeowners choosing to stay put in their homes and renovate or upgrade instead of starting over. That means homes that would have otherwise been listed for sale are not making it to the market.

As the classic economic equation goes, high demand and low supply translates into higher prices for sellers. While that may be fantastic for those looking to turn a profit on the sale of their homes, that’s bad news for people who can barely afford the price tag. This is especially true for first-time homebuyers who are finding it nearly impossible to get into the market at all, and are forced to delay flying the coop or foregoing rent in favor of obtaining title on a property.

Obstacles in the Way of Building New Housing

Considering the number of residents that California houses, it would only make sense to ensure accommodations meet needs. But new home builds just aren’t keeping up with demand and need. While 13 percent of the national population calls California home, only about 8 percent of all building permits across the country come from California.

The continual lack of new home construction has done nothing more than contribute to steadily increasing housing prices and decreasing inventory.

So what’s standing in the way of new home construction? For one, California has some pretty stringent regulations when it comes to construction quality. Construction labor costs are high, and land costs and fees are through the roof. Local governments tend to slap developers with exorbitant expenses related to residential building construction.

The cost of undeveloped land is also extremely high, especially in areas like LA and Bay areas where such land has become scarce.


Foreign Buyers

Foreign buyers are key players in the game of real estate in the US. And the money coming from abroad tends to be very focused and targeted. Canadians like their Florida and Arizona real estate, for instance.

And when it comes to California, buyers from China are swooping in by the hoards. In fact, Chinese buyers currently sit at the top of the list of foreign investors snatching up American real estate, particularly in the Golden State.

With a lack of supply currently plaguing the housing market in California, it could very well be that foreign buying is driving up housing prices in select markets across the state. Foreign buyers are simply paying a lot more than your average domestic homebuyer. According to the National Association of Realtors (NAR), the mean price paid by American buyers for homes was $255,600 in 2015, compared to $499,600 for foreign buyers. 

Whatever is driving prices up in California real estate, low- to middle-income families continue to face a housing affordability crisis.