Gov. Gavin Newsom’s “Marshall Plan” to meet a goal of producing 3.5 million new housing units in California has run roughshod over cities and counties.
Indeed, there’s been a flurry of lawsuits on the part of local communities contesting Sacramento’s right to force onerous zoning mandates on them. These mandates are increasingly being seen as a ham-fisted statewide initiative that undermines what up-to-now has been the purview of local communities.
In light of this increasingly combative state versus local battleground, it might be helpful to dig deeper into the report that inspired Newsom’s goal of building 3.5 million new housing units. That report is McKinsey & Co.’s “A Tool Kit to Close California’s Housing Gap: 3.5 Million Homes by 2025.”
The empirical basis for the report’s 3.5 million goal is quite simple: In 2014, California’s number of housing units per 1,000 people was 358 versus a national average of 419. To move California from 358 housing units per 1,000 to the U.S. average, it’s simple math for the McKinsey authors to conclude that the state will need 3.5 million units.
Figure 1, which we’ve reproduced from the McKinsey report, was presented by the authors to justify their conclusion that California is severely under-housed.
The sophistry of this approach can be seen by analyzing the state outliers in Figure 1.
Utah, for example, is shown as having the lowest number of housing units per 1,000 people at 347. But Utah’s low housing ratio isn’t because of an inadequate supply of housing; it’s explained by its dominant religious and cultural values that lead to an average household size of 3.14 as compared to a national average of 2.64. The state’s larger families mean that Utah needs larger but not as many homes as other states.
On the other end of the continuum in Figure 1, Maine has the highest number of housing units per 1,000 people at 547. But that isn’t because Maine is over-housed.
Rather, it’s because the economy has been so weak, as relatively well-paying manufacturing jobs are in steep decline, forcing the state’s skilled workers to move and leaving a lot of empty homes. In addition, Maine is the nation’s top state for vacation homes—one of every five homes is for vacation, which means they sit empty most of the year. If you adjust for all those empty homes, Maine’s 547 housing units per capita would revert to 430, near the national average.
The presence of a relatively high percentage of vacation homes also helps explain the high housing ratios for Wisconsin, Florida, and Arizona.
There are many other socioeconomic factors that affect a state’s supply of housing that have little or nothing to do with whether a state is over or under-housed. These include a state’s divorce rate (more divorces require more homes), the proportion of immigrants living in a state (immigrants typically have larger families); and the desirability of climate and other natural amenities (higher land prices and rents lead to more people on average living in a housing unit).
By ignoring these differences, the McKinsey authors’ conclusions and policy recommendations in the report are highly suspect. Yet, this report has served as the analytical foundation for California’s draconian public policy responses relating to our housing supply.
An alternative way to assess whether California’s housing stock isn’t keeping up with demand is to measure how the average number of people per unit is changing over time. If California is losing ground, one would expect the average number of people per unit to increase over time. But as shown in Figure 2, that isn’t happening in California.
Over the 2010-19 period, the average number of people living per residential unit has remained stable and even declined a bit in 2019. This means that the total number of units produced in California has kept pace with the growth in the state’s population, at least over the 2010-19 period.
Astute readers of this article might argue: “The overall average may be constant, but that may be explained because an increasing number of Californians are being forced to rent rather than have a hallowed part of the American dream—a home of their own.”
Yet, again, the statistics don’t support such a view. As shown in Figure 3, the ratio of people per owner-occupied unit hasn’t changed much while the number of people per rental unit has declined.
As shown in Figure 4, the percentage of people renting versus living in an owner-occupied unit in California has actually been declining since 2015.
So if the data shows that housing units and rental units are indeed keeping pace with population growth, why all the hoopla over California’s so-called housing shortage?
Maybe it’s because of all the attention being given to McKinsey’s seriously flawed study. Or maybe it’s because our state government would rather place the blame of more and more people moving out of the state on the housing industry and local zoning policies rather than on its tax and regulatory policies. If that’s the case, the McKinsey report simply serves as statistical fodder for Sacramento’s thrust into greater regulation of housing markets.
Alternatively, if you buy our argument that the housing supply in California is keeping up with demand, why then are our housing prices in the state at such stratosphere levels? Ah … that’s the million-dollar question—one that we will attempt to explain in our next Leader Board.
Editor’s Note: James L. Doti, one of the nation’s most accurate economic forecasters, last week gave his annual forecast for 2022. See page 4 for details.
