Why Affordable Housing Is Key to Overall Economic Prosperity

In California, and many other expensive states, the lack of reasonably priced homes impacts job growth, income growth and overall economic health, contends the director of the USC's Lusk Center for Real Estate.
Richard K. Green  Image courtesy oUniversity of Southern California Lusk Center for Real Estate

Southern California’s housing market is expensive, both in absolute terms and relative to its household incomes. This creates potential problems in two dimensions: it discourages businesses, who must pay higher wages to attract and retain talent, from growing, and it makes it difficult for workers in low-pay occupations from remaining. 

The University of Southern California Lusk Center for Real Estate did an affordability “reality check” at its Orange County Executive Forum in June and discussed broader impacts of homelessness and affordability on the California economy. While Southern California’s problems are extreme, many of our cities that are engines of innovations—Seattle, the Bay Area, San Diego, Boston, New York and Washington—also have severe housing cost problems.

The starkest manifestation of the problems created by expensive housing is homelessness.  It is a shibboleth that the homeless are either mentally ill or addicted to drugs.  My colleague Gary Painter has shown that more than half of the homeless in Southern California are on the streets for economic reasons like lost jobs, inability to afford their rent or an eviction. Zillow funded a study that finds a strong positive connection between the propensity for homelessness and the percentage of income spent on rent. This, of course, does not include millions of other renters (and even some owners) who are employed and still barely making ends meet.

Housing Lags Employment Growth

Expensive housing reduces living standards.  It also may inhibit job growth. Since 2006, which is the last peak period for the California economy, Southern California has added 700,000 payroll jobs. The area is again at full employment, which means there are 700,000 new employees in Southern California who need a place to live.

The rule of thumb is that one net new house is needed for every new job. Southern California has not built at remotely that rate since the last employment peak.  This means housing may be constraining the ability of California to attract new jobs.

At the same time, an unusually large cohort of kids are growing up, entering the workforce and leaving home. So, in addition to housing demand brought on by new jobs, young adults are moving out and increasing the demand (this is the subject of USC Ph.D. Sarah Mawhorter’s dissertation.)  

The result: Southern California is now unable to house everyone who has a job and is falling further and further behind each year. For people without strong ties (and perhaps even for people with such ties), the best option can be to move. This is producing both an out-migration phenomenon that looks quite different than it did ten years ago—it is not absence of jobs that is pushing people out, but rather cost of living.

In 2008, new members of the workforce were leaving California for Texas in search of jobs. In 2018, they are moving to places like Phoenix and Las Vegas—places closer to family—because unemployment in these cities is low, and so too is the relative cost of housing.  One could almost say that metropolitan Southern California is enveloping Arizona and Nevada.

The constraint California is facing can be summarize in one statistic: it has fewer houses per person than any state except Utah. Utah’s high person-to-house ratio reflects a very high fertility rate and, therefore, a large number of children per household. The reason California has so few homes per person is it simply because there aren’t enough homes. 

If California and metropolitan areas around the country want job growth, income growth and overall prosperity, they simply can’t have it without more housing.

Richard K. Green is director of the University of Southern California Lusk Center for Real Estate and professor in the USC’s Sol Price School of Public Policy and the Marshall School of Business.