Why Is Housing So Expensive in California?

TL;DR

California housing is expensive because strong demand for homes near productive urban jobs exceeds a supply restricted by slow, uncertain entitlement procedures and repeated appeals. Increasing housing in urban cores, especially alongside public transportation, could moderate unnecessary price pressure while reducing congestion, green-space loss, and the larger household carbon footprints associated with development on the region's outskirts.

Transcript

our next session is going to be uh equally interesting and informative I think and I'm pleased to moderate another one of my colleagues uh Rebecca Diamond uh she will be moderating the session Rebecca is the class of 1988 professor of Economics at Stanford's Graduate School of Business where she teaches data and decisions her curren... Read More

Key Insights

• California housing prices are driven by demand exceeding supply, with the imbalance especially strong in built-up urban areas such as San Francisco, Oakland, the Peninsula, and San Jose, where access to desirable jobs makes residential locations particularly valuable.
• Strong housing demand is partly evidence of economic success because the Bay Area's labor demand and local economy have grown rapidly. High prices also reflect an avoidable problem, however, because local policies prevent housing supply from responding adequately where demand is strongest.
• Self-imposed supply constraints are a central cause of scarce urban housing. Residents and voters have adopted rules that slow development, limit construction in desirable communities, and contribute to rents and home prices that are unnecessarily high relative to available supply.
• The entitlement process is both lengthy and unpredictable, sometimes taking years or decades between land acquisition and permission to obtain a building permit. An extensive appeals process adds further uncertainty, making the timing and financial viability of housing development especially difficult for builders.
• Development timing is critical because builders have limited periods within an economic cycle when construction is feasible. When they cannot predict when approvals will arrive, projects may miss that opportunity, reducing the number of homes ultimately added over the long run.
• The Austin model allows housing to be built rapidly when demand appears by imposing relatively few supply restrictions in both central and peripheral areas. The approach has contained price growth relative to the Bay Area, but it has also produced congestion and consumption of environmental amenities.
• The Seattle model concentrates new development within the urban core and pairs it with expanded public transportation. This approach seeks to accommodate strong housing demand where jobs are located while mitigating congestion and other negative effects associated with accommodating growth farther from employment centers.
• Restrictions in Bay Area urban cores redirect some housing construction toward regional outskirts, the Central Valley, and locations even farther away. This displacement contributes to traffic, the development of green land, and larger residential energy carbon footprints than construction in central San Francisco.

Questions & Answers

Q: Why is housing so expensive in California?

Housing is expensive because demand, especially near productive urban employment centers, exceeds the available supply. The Bay Area's strong labor market attracts residents who want access to its jobs, while local development constraints keep construction from responding sufficiently. Slow entitlements, uncertain approval schedules, and extensive appeals consequently contribute to unnecessarily high rents and home prices.

Q: How do local regulations restrict California housing supply?

Local regulations restrict supply through a slow, arbitrary entitlement system and an extensive appeals process. A developer may wait years, or in some cases decades, between purchasing land and obtaining permission to pull a building permit. Because the duration is also uncertain, developers cannot reliably coordinate construction with the limited part of the economic cycle when building is viable.

Q: Why does uncertainty in housing approvals matter to developers?

Approval uncertainty matters because developers must make decisions about land and financing before knowing exactly when construction can begin. They also face a limited window within the economic cycle when a project can proceed successfully. A long process is costly by itself, but an unpredictable process is especially damaging because delayed permission can cause a project to miss that window entirely.

Q: Where should the Bay Area build more housing?

The strongest case is for adding supply in the urban core, including San Francisco, Oakland, the Peninsula, San Jose, and other downtown areas where demand is highest and desirable jobs are concentrated. Building more homes in these locations would address the central demand and supply imbalance rather than pushing households toward distant outskirts with greater transportation and environmental consequences.

Q: What is the Austin model of housing development?

The Austin model places relatively few constraints on housing supply in both the urban core and the regional periphery. When employment and housing demand grow, homes can therefore be constructed rapidly. Housing prices still increased during its technology-driven expansion, but not as much as in the Bay Area. The tradeoffs described include congestion and consumption of environmental amenities.

Q: What is the Seattle model for increasing housing supply?

The Seattle model seeks to concentrate new housing development within the urban core while increasing public transportation. Its purpose is to accommodate more residents near employment and existing development while mitigating the external effects of growth. It differs from a broadly permissive regional model because it guides construction toward central locations and connects added density with transit investment.

Q: How do urban housing restrictions affect green space?

When communities prevent a needed housing unit from being built in downtown San Francisco, Palo Alto, San Jose, Oakland, or another central area, demand does not simply disappear. Some construction is displaced toward the regional outskirts, the Central Valley, or even farther away. Building on previously green land reduces the environmental amenities available across the broader region.

Q: How does housing location affect congestion and carbon emissions?

Shifting housing from central cities toward distant outskirts increases traffic because residents live farther from the urban jobs that generated much of the demand. Location also changes residential energy emissions. The presented Bay Area map shows large differences in annual household carbon footprints across San Francisco, Oakland, the outer East Bay, and Marin, demonstrating that development location has meaningful environmental consequences.

Summary & Key Takeaways

• Housing prices in California and San Francisco rose much faster than the national median from the early 1990s through 2017. Strong labor demand made urban locations desirable, but housing construction failed to match that demand. The resulting imbalance pushed rents and home prices unnecessarily higher, particularly throughout the Bay Area's urban core.

• The shortage largely reflects constraints that residents and voters imposed through local policy. Developers may spend years or even decades securing entitlements, while an extensive appeals process makes completion dates unpredictable. That combination raises development costs and can prevent projects from reaching construction during the limited periods when market conditions support building.

• California has followed neither Austin's broadly permissive approach nor Seattle's strategy of concentrating development in urban centers while expanding public transportation. Restricting construction in high-demand downtown areas shifts housing toward distant outskirts and the Central Valley. The consequences include more congestion, green-space loss, and substantially different household carbon footprints across locations.