Fall 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
California Adds Jobs
California has added more than 440,000 jobs since the trough of the pandemic, but that translates to just 2.5% growth. In other words, California’s job gains are largely a function of its size.
Labor Force Still Below Pre-Pandemic Peak
There are still roughly 168,000 fewer workers in California’s labor force than there were pre-pandemic, a 0.9% decline. In contrast, the national labor force has grown by about 2.7 million workers.
New Household Formation Exacerbating Housing Crisis
Confoundingly, from 2020 to 2023, California lost about 600,000 people but added about 263,000 new households. The number of people per household also declined from 2.86 to 2.77.
KEY INDICATORS
Job Openings Outstrip Workers
California currently has 1.04 million job openings, but only about 889,000 unemployed persons.
CA Home Prices Barely Below Peak
Home prices are just 6.4% below their pandemic peak, and at the current pace of growth, will surpass that peak in the 1st quarter of 2024.
California’s Population Conundrum
Between 2010 and 2022, the number of domestic residents moving to California minus the number moving out, totaled -2.3 million.
An Expanding, Albeit Constrained California Economy
California continues to be a national leader in jobs creation. In the period of economic expansion following the pandemic-induced recession, the Golden State has added more than 440,000 jobs, according to the latest employment figures from the Bureau of Labor Statistics (BLS). In fact, California ranks third overall in terms of jobs added since the pandemic, behind only Florida and Texas. Nonetheless, the 440,000 jobs added translates to just 2.5% growth since the start of the pandemic, which reflects the fact that California’s job gains are largely a function of its size. That is, relatively modest employment growth translates into a large number of new jobs.
In percentage terms, California has exhibited the slowest employment growth among job states and ranks near the middle of the pack among all states. In fact, California’s employment growth aligns closer to small- and mid-size states with more modest post-pandemic job gains.
The reason California’s job growth mirrors Missouri and not rapidly growing states like Texas, Florida, and North Carolina is a shortage of workers. As of July 2023, there were 1.04 million job openings in the state, but only about 889,000 unemployed persons. There simply are not enough workers to fill the current number of openings. According to the most recent data from the BLS, there are still roughly 168,000 fewer workers in the state’s labor force than there were in January 2020, prior to the pandemic, which equates to a 0.9% decline. In contrast, the national labor force has grown by about 2.7 million workers, or 1.7% during the same period.
California’s labor force woes are evident in the chart below, which shows the percent growth in labor force compared to the nation since January 2020. While the national labor force recovered all the workers lost during the pandemic in August 2022, California lags far behind.
Adding the missing 168,000 workers back into the labor force, California’s unemployment rate rises above 5%. While not bad from a long-term perspective, it is higher than the published 4.5%, and reveals that part of California’s recovery in the data reflects people opting out of the workforce. In summary, the concern for California is not a lack of jobs, but rather a lack of workers.
The state’s simultaneous jobs gains and labor force decline also reveal a contradiction. California has added about 440,000 jobs since the start of the pandemic, but there are fewer workers active in the economy. A possible explanation is that there are more workers in the state holding multiple jobs. Whatever the underlying causes, California employers have struggled to find enough workers to fill open positions, and this caused real wages to surge during and immediately after the pandemic. Real wages have since fallen to levels just above where they were prior to the pandemic. Higher interest rates and high inflation have cooled wage growth in California, and real wages are reverting to their pre-pandemic trend.
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?
Home Sales Continue to Decline, but Prices Bounce Back
California’s labor force struggles and the underlying factor ultimately constraining jobs growth is the state’s chronic housing shortage. In the decade between 2013 and 2023, the Golden State is on track to add an estimated 3 million jobs, but only authorize about 1.2 million residential building permits. The large discrepancy between housing supply and jobs added has made California among the most expensive housing markets in the country, and Beacon Economics believes soaring housing costs are part of the reason why the state’s labor force has not yet recovered to pre-pandemic levels more than a year after the national labor force returned to growth.
Rapidly rising interest rates have further exacerbated California’s housing shortage, as existing homeowners locked into historically low mortgage rates are either unwilling or financially unable to sell. Beacon Economics expects this ‘lock-in’ effect and increasing cost of a mortgage to weigh on home sales in the near-term outlook. Seasonally adjusted existing home sales declined 5.9% and 5.7% on a monthly basis in June and July, respectively. On a year-over-year basis, home sales have declined for 23 consecutive months stretching back to August 2021. Most recently, home sales fell 22.6% and 9% year-over-year in June and July, respectively, and are still about 33% below their pre-pandemic peak in February 2020.
Meanwhile, median home sale prices have come down from their pandemic surge, falling 10.6% from their peak in April 2022 to February 2023. However, home prices appear to have bottomed out, returning to growth on a monthly basis in March 2023, and registering year-over-year growth for the first time since September 2022 in July 2023. As of July, prices are about 33% above the pre-pandemic peak, and only 6.4% below the pandemic peak. At the current pace of growth during the past 5 months, California home prices will surpass the pandemic peak in the first quarter of 2024.
While high interest rates are putting downward pressure on home sales, house price depreciation has been limited due to California’s chronic housing shortage. Additionally, consumer balance sheets are relatively strong, and although unemployment has ticked up, it is still relatively low. As such, Beacon Economics does not foresee a collapse in housing, but rather a housing correction. And recent growth in home prices suggest that the housing correction may have largely run its course.
Despite the decline in home sales activity, there is less than 2 months of housing supply available in California. In other words, if no new units were added to the housing market, based on current sales activity thus far in 2023, the number of single-family homes for sale would be exhausted in about 7 weeks. A healthy housing market is typically considered to be one that has six months of supply. The long-term problem is, of course, that California does not build enough housing.
California’s Population Conundrum
In January, the California Department of Finance (CDF) released updated population estimates showing the state’s population had declined 0.7% and 0.5% in 2021 and 2022, respectively – prior projections released in July 2021 had the state’s population growing in both years. A confluence of demographic and economic factors have led to the state’s first population decline in recorded history.
For one, California’s birth rate is at an all-time low. The crude birth rate (number of births per 1,000 people) was 10.5 in 2021. While falling birth rates are a national trend, 2021 marked the first time since 1974 that California’s birth rate fell below the national rate.
The pandemic also led to an increase in deaths, and apart from COVID-19, deaths have been increasing generally due to an aging population. The chart below shows the uptick in deaths associated with an aging population beginning around 2010, when the oldest baby boomers would have been in their mid-60s. The death rate spiked during the pandemic, but has since come down. However, recent declines in the death rate coming out of the pandemic obscure the deaths associated with an aging baby boomer population, which are expected to continue into the future.
While falling birth rates and increasing deaths are part of the equation, the bulk of California’s population losses stem from a large outflow of domestic migrants to other states. And unlike falling birth rates and increasing deaths, which are national trends, domestic outmigration is a phenomenon more unique to California. According to the CDF, between 2010 and 2022, California net domestic migration (that is, the number of domestic residents moving to the state minus the number of residents moving out of the state totaled -2.3 million people. In 2021 and 2022 alone, the state saw a net outflow of more than 750,000 domestic migrants. International migration to California also slowed significantly during the past three years, exacerbating the impact of domestic outflows.
As a state that has long suffered from too many people vying for an extremely short supply of housing, the California exodus might seem like an encouraging first step toward reducing the state’s chronic housing shortage. The short answer is that that it’s unlikely to have any immediate impact on bringing housing costs down. First, California’s housing shortage is deep. By some estimates, the state was 3.5 million homes short of what it needed to accommodate its population in 2016. While the state has started building housing units at a more rapid pace during the past few years (about 377,000 units from 2020 to 2023), that pace of building will need to be sustained and/or accelerated over a decade or more to make an appreciable dent in the housing shortage. What’s more, the CDF’s updated forecasts showing essentially zero population growth in California over the next several decades will also need to hold.
But one of the confounding aspects of California’s population decline is that it has coincided with an increase in household formation. The table below shows that during the period from 2020 to 2023, California lost about 600,000 people but it added about 263,000 new households. Furthermore, the number of people per household declined significantly during this period, falling from 2.86 in 2020 to 2.77 in 2023.
The reasons we have fewer people living in more households include many of those contributing to the state’s overall population decline, such as a lower birth rate and an aging population (seniors are more likely to live alone or with one other person). But Californians have also spread out, initially to limit their exposure to COVID-19, and because remote work has enabled them to live father away from their employer. Strong income growth has also contributed somewhat to the dissolution of multiple roommate households. Additionally, California is building more multifamily housing relative to single-family homes. Apartments and condominiums, by definition, accommodate a smaller household size.
But one of the confounding aspects of California’s population decline is that it has coincided with an increase in household formation. The table below shows that during the period from 2020 to 2023, California lost about 600,000 people but it added about 263,000 new households. Furthermore, the number of people per household declined significantly during this period, falling from 2.86 in 2020 to 2.77 in 2023.
The increase in new household formation spurred demand for rental housing and vacant homes, pushing up prices and rents, and sending vacancy rates plummeting. According to CDF estimates, California’s housing vacancy rate fell from 7.6% in 2019 to 6.6% in 2023. This rate is one of the lowest in the country, and it indicates that California is still very much in the throes of a housing crisis spawned by decades of population growth that outpaced growth in housing units.
Moving forward, progress toward easing the state’s housing crisis will depend in part on a tug of war between competing demographic and economic factors. On one hand, a strong labor market could spur even more household formation, and Millennials as a cohort are still in the age range when household formation grows. On the other hand, high housing costs pose a constraint to new household formation, and higher interest rates and more expensive mortgages have only exacerbated California’s housing affordability problem.
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