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Press Release · March 10, 2004

Estimates Of State Housing Shortage Overstated

But Shortfalls in Major Metro Areas Are Cause for Concern

SAN FRANCISCO, California, March 10, 2004 — California’s housing shortfall is much smaller than previous estimates and is almost entirely confined to the state’s three largest metropolitan areas, according to a report released today by the Public Policy Institute of California (PPIC).

The report, In Short Supply? Cycles and Trends in California Housing, finds a statewide housing shortage of around 138,000 units. Although a substantial shortfall, this figure is far lower than estimates often cited in the media – ranging from 500,000 to over 1,000,000 units. Why the gap? Many estimates simply compare housing production rates across decades – new housing production in California fell from 2.1 million units in the 1980s to 1.1 million in the 1990s. However, the authors argue that the drivers of supply and demand – especially larger economic and demographic factors – must be taken into account when considering the size of the shortage. Indeed, they find that those factors explain most of the anemic housing production during the 1990s. These factors include:

  • The severity and duration of the early 1990s recession.
  • A dramatic slowdown in population growth during the 1990s.
  • A change in the composition of population growth in the 1990s: Immigrants and children – who consume less housing than others – constituted a larger share of growth.
  • Developments in monetary policy and financial markets, including investments in stocks as opposed to real estate, in the late 1990s.

Although these findings do not point to a large statewide crisis in housing production, the report does find significant shortages in the state’s three largest metropolitan areas – Los Angeles, the San Francisco Bay Area, and San Diego. The magnitude of these shortages is lower than previous estimates, but they are still significant – 101,000 units in Los Angeles, for example. The authors find that shortfalls in these areas are partially offset by surpluses in other geographic areas, including Fresno and Sacramento Counties.

“There are some serious regional concerns about housing supply and affordability in California,” says Hans Johnson, a demographer and PPIC research fellow who co-authored the report with Rosa Moller (California Research Bureau) and Michael Dardia (SPHERE Institute). “However, we do see evidence that the magnitude of the statewide crisis has been overstated.” Indeed, the report notes that the state’s housing situation in 2000 was perhaps better, and certainly not worse, than in 1990.

The Public Policy Institute of California is a private, nonprofit organization dedicated to improving public policy in California through independent, objective, nonpartisan research on major economic, social, and political issues. The institute was established in 1994 with an endowment from William R. Hewlett.