In California, the housing market has been experiencing a long-term imbalance between supply and demand, leading to continuous price increases. A recent study revealed that over the past six years, the number of new housing units built in California far exceeded the rate of population growth, yet the housing inventory remains extremely tight. What is causing this situation?
According to a study by the Public Policy Institute of California (PPIC), from January 2019 to January 2025, California added 677,000 new housing units, while the population growth during the same period was very sluggish, increasing by only 39,000 people.
Conventionally, adding 677,000 housing units should drive up the overall vacancy rate in the state, thus alleviating housing cost pressures. However, the market does not appear to be loosening up. On the contrary, California’s owner-occupied housing vacancy rate dropped from 1.2% to 0.8%.
PPIC pointed out that a major reason for this is that the average number of people living in each household in California has been decreasing over the past five years. Therefore, more housing is needed to accommodate the same population.
Furthermore, researchers found that the population in California is rapidly aging, with elderly individuals tending to live alone or in small two-person households, leading to an increase in the demand for smaller or entry-level housing.
In other words, even if California’s future population growth stagnates or declines, continual construction of new housing will be necessary to alleviate market pressures.
Experts emphasize the complexity of California’s real estate market, with a significant backlog of housing shortages that may be challenging to address in the short term due to the imbalance between supply and demand.
“For decades, the number of new housing units built in California has lagged far behind economic growth and population expansion,” said Jordan Levine, Vice President and Chief Economist of the California Association of Realtors (C.A.R.). “Even counting the additional Accessory Dwelling Units (ADUs), based on estimates from the Department of Housing and Community Development, California’s annual new housing construction falls far short of the minimum required target.”
He noted that as of March this year, California’s housing inventory further tightened, with available homes on the market sufficient for only 3.3 months of sales. This is attributed to various factors, including the “lock-in effect” of interest rates, where homeowners with lower rates may be reluctant to sell their homes in the current higher rate environment, and concerns about losing their original lower property taxes when moving.
Despite California’s recent years of adding more housing units than new residents, the construction pace is still inadequate.
A report released by the White House Council of Economic Advisers on the 13th highlighted that the U.S. currently faces a shortage of approximately 10 million single-family homes, a figure significantly higher than estimates from most market institutions. Some regions, due to high regulatory costs and lengthy development processes, restrict supply and drive up prices, with California being a prime example.
Data shows that per housing unit, the impact and development fees in California average around $29,000, compared to less than $1,000 in Texas. The average completion time for construction projects in California is also 22 months longer than in Texas.
The White House Council of Economic Advisers pointed out that cumbersome regulations not only inflate construction costs but also affect development speed, further exacerbating the supply-demand imbalance.
For a long time, housing prices in California have remained high, posing a heavy burden on housing costs.
According to C.A.R. data, in March, the median home price in California surged by 7.1% compared to February, reaching around $889,000.
As the market enters the busy spring homebuying season, it is expected that prices will continue to rise. However, concerns about war and inflation may slightly dampen the pace of price increases.