Winter 2023
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.
HIGHLIGHTS
Recovered!
California reached a key milestone in October 2022: The state finally recovered all the jobs that were lost due to the pandemic-driven shutdowns. It reached this goal more slowly than the U.S. as a whole and more slowly than many other states.
Where Have All The Workers Gone?
Typically, there are more unemployed workers in California than there are job openings, but since the outbreak of the pandemic, that status quo has been turned on its head. Today, employers in the state are struggling to hire the workers they need.
Housing Market Turns Cold
Currently, the number of homes that have sold in California is around half the level it was in 2021 and is approximately one-third lower than during the years immediately prior to the pandemic.
KEY INDICATORS
Hands Down: Inland Beats Coast In Job Growth
Since 2000, California’s inland communities have added jobs at three times the rate of coastal communities.
It’s All About Housing
Since 2000, the number of housing units in inland California has also grown at three times the rate of coastal communities. Prices in inland areas are around half of what they are along the coast.
Homeownership Costs Soar
The monthly mortgage cost of owning a median priced home in California has doubled since August 2020 as rising interest rates drive up borrowing costs.
California Forecast – Key Indicators
California’s Labor Market Recovery Is Complete
In October, California’s economy reached a milestone, having finally recovered all of the jobs that were lost during the outset of the COVID-19 pandemic. While the state reached this milestone more slowly than the national economy, and indeed more slowly than many other states, the primary reason is that California’s labor market has been in the midst of a pronounced labor shortage. Employers in the state have struggled to hire workers and fill positions. The chart below illustrates the number of job openings versus the number of unemployed workers in California over the past five years. Typically, there are more unemployed workers in the state than there are job openings, but since the outbreak of the pandemic, this status quo has been turned on its head. Since October 2021, there have been more job openings in California than there are workers to fill these positions, meaning that worker availability has been the primary constraint on job growth in the state.
Across the United States, there has been a clear relationship between labor force expansion and how states’ labor markets have recovered from the pandemic. The chart below plots labor force growth against jobs added from February 2020 (the pre-pandemic peak) to October 2022 (the most recent data point available). States that experienced labor force expansion have also had the highest job growth, while in states where the labor force has contracted the most, job counts have not yet recovered to their pre-pandemic levels. This phenomenon has also been playing out regionally within California where a given county’s job’s recovery has been closely tethered to that county’s labor force expansion.
In California, the pandemic has accentuated a long-term trend. One in which the state’s inland areas have absorbed many more jobs than the state’s coastal communities. Since 2000, the state’s inland communities have added jobs at three times the rate of coastal communities.
Housing supply and prices are the key point of differentiation between California’s inland and coastal regions. Not only has the supply of housing units grown more quickly in inland areas, but inland communities also provide more affordable housing. Since 2000, the number of housing units in the state’s inland communities has grown at three times the rate of coastal communities, while housing prices in inland areas are around half of what they are in coastal communities.
In California, this dual dynamic – limited housing supply, and consequently, relatively high prices – is having increasingly worrisome consequences. The following two charts reveal the net migration that has occurred in the state from 2012 to 2021. Respectively, the two charts track the difference between how many people have moved to California versus how many people have moved out by different levels of income and educational attainment. Since 2012, far more lower-income workers have left the state than have moved in. At the same time, workers with lower levels of educational attainment have been leaving California at a faster rate than they have been moving to the state. In short, California, given its high housing prices, is a net exporter of workers with lower levels of earnings and formal education, and a net importer of workers with higher levels of formal education. This represents a key policy challenge for the state as the economy produces (and needs) jobs that pay a range of wages. How can California, and particularly its large metropolitan areas, provide affordable housing for its lowest income workers, preventing their exodus from the state?
California’s Labor Market Recovery Is Complete
Given today’s higher interest rate environment (described further in the national outlook), California’s housing market continues to show signs of weakness. Over the past five years, the only time when home sales were lower than they are today was during the depths of the pandemic, when the state’s economy was effectively shut down. Currently, the number of homes sold in the state is at around half the level it was in 2021 and is approximately one-third lower than during the years immediately prior to the pandemic.
The drop in home sales has led to an increase in the number of available homes on the market, although the current level remains far below pre-pandemic inventories. This means that, despite the drop-off in sales, housing supply in the state remains incredibly constrained. The tight supply of housing will have two consequences. First, when interest rates begin to fall, the consequent increase in buyers will again place upward pressure on housing prices. Second, while prices can and may go lower (indeed they have begun to turn down slightly), there is not enough supply in the market to provide the type of overhang that could lead to steep price cuts.
Housing prices fall for two primary reasons. The first occurs when supply exceeds demand. The second occurs when demand falls relative to supply. The present weakness in California’s housing market is being driven by a drop in demand, which in turn is being driven by the higher cost of owning a home (interest rates). Based on prevailing mortgage rates, the chart below shows the monthly cost associated with owning a median priced home in the state, on a 30-year fixed rate mortgage. A combination of higher prices and higher borrowing costs mean that the monthly mortgage cost of owning a median priced home in the state has doubled since August 2020.
To meaningfully lower the costs of home ownership in California, the supply of housing must increase, particularly in the state’s largest metropolitan areas.
The turbulence created by higher mortgages rates, inflation, and a slowing real estate sector will cause the state’s economy to slow in 2023, although a recession is not a foregone conclusion. High levels of consumer spending have continued nationwide and will likely drive the U.S. and California economies in the near term. With the state fully recovered from its pandemic-driven job losses, California should begin to focus on the deeper, longer-term policy challenges (such as lack of housing supply) that fundamentally and negatively affect its population and business climate.
For more information
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