The Beacon Outlook: California
Welcome to The Beacon Outlook
This succinct, quarterly outlook delivers up-to-date analysis of leading indicators driving the national and state economies, including GDP growth, employment, housing and commercial real estate markets, taxable sales, international trade, and more.
Uneven Employment Recovery
California’s jobs recovery has been uneven with inland communities faring better than coastal ones. E.g., the Inland Empire has 5% more jobs today than it did prior to the pandemic, while there are still 3% fewer jobs in Ventura County.
Housing Market Slowing, Not Crashing
Despite recent handwringing, a crash of California’s housing market is nowhere in sight, although a number of metrics point to a slowdown in price growth in the state.
Priced Out: Coastal California Losing Population
Driven by affordability, from 2019 to 2022, inland communities across California have gained population while there have been population losses in coastal communities.
California still has 73,000 fewer jobs than pre-pandemic, but if the state adds the same number of positions in the next data release as it did in the last (around 83,000), California will have made a full job recovery.
Home prices in California have increased by 43% over just a two-year period. Stretched prices along with today’s rising interest rates has led to a major slowdown in 2022.
Over the past year, most major markets in California have seen double-digit increases in rent, with some communities experiencing 20% surges.
California’s Jobs Market On The Verge Of A Milestone
California’s economy is on the brink of achieving a significant milestone: recovering all the jobs it lost during the pandemic-driven downturn. In March and April 2020, the state’s economy shed approximately 2.7 million jobs following the outbreak of the COVID-19 virus. While the jobs lost during the outset of pandemic have recovered nationally, and in many other states, California has yet to reach this threshold, but should in the coming months. With an outstanding deficit of 73,000 jobs, compared to pre-pandemic levels, if the state’s economy adds the same number of positions in August that it added in July (around 83,000), it would move California’s job count above water.
The employment recovery has been uneven across the state, with inland communities faring better than coastal areas. The Inland Empire has 5% more jobs today than it had prior to the pandemic, while at the other end of the spectrum, there are still 3% fewer jobs in Ventura County.
California’s struggles are relatively well understood. Its labor force contracted during the pandemic, and employers have struggled to find workers, especially in coastal communities. This point is best illustrated at the regional level. The labor forces in the three regions that have experienced a full jobs recovery – the Inland Empire, Sacramento, and Fresno – are larger than they were prior to the pandemic, while the biggest decline in the labor force has occurred in the three regions with the biggest jobs deficits: Ventura, San Francisco, and Los Angeles.
The primary driver of change in local labor forces is population growth. Over the period from 2019 to 2022, population gains have occurred in inland communities while there have been population losses in coastal communities. The changes across these regions are ultimately driven by affordability. California’s relatively affordable inland communities have gained, while its relatively expensive coastal communities have lost population. Among the state’s coastal communities there has been an exodus of lower earning workers who are unable to support the extremely high costs of housing.
This dynamic has been playing out at the state level for nearly a decade, where there has been an out-migration of lower earning workers and workers with lower levels of formal education, while there has been an in-migration of higher income and higher educated workers. The in-migration of higher income earners has not been enough to offset the loss of lower earners, meaning that in total the state has lost population over this time.
A Housing Slow Down
After two years in which California’s housing market has gone gangbusters, and home prices in the state increased by 43%, on average, the rising interest rate environment, in addition to stretched prices, has led to a major slowdown in 2022. Home sales in the state have dropped by about one-quarter this year, compared to 2021 levels. Over the past five years, sales have only been lower during the outset of the pandemic, when markets temporarily seized up.
The decline in home sales is not difficult to understand, given the jump in prices over such a short period of time. Throughout the state, the increase in the cost of a monthly mortgage payment has meant that many potential buyers have been pushed to the sidelines. When adjusted for inflation, the cost of owning a home is pushing levels not seen since 2005. However, unlike then, today’s lending standards mean that borrowers have an entirely different level of financial security, and a crash of the market is nowhere in sight, although a number of metrics point to a slowdown in price growth in the state.
Data released by Redfin, a real estate brokerage company, for example, indicate a slowdown in home prices in California. While data from brokerage companies should be interpreted with some caution, they do at least provide a gauge of the market’s temperature. Still there is unlikely to be a major drop in prices, as some buyers may be expecting. While the months of supply of housing has ticked up slightly this year, housing supply is still far below pre-pandemic levels. California remains a supply-constrained housing market.
Finally, Californians have not been able to find relief from high housing prices via the rental markets. Over the past year, most major markets in the state have seen double-digit increases in rents, with some communities seeing 20% surges. Overall, the pandemic both accelerated and exacerbated the state’s long-term housing supply problem.
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