High living costs solidify California’s two-tier economy

Why California is what it is – a state with an immense economy but equally immense socioeconomic divisions – is the topic of perpetual academic, media and political debates.

There is one factor, both a cause and an effect, that cannot be debated: California is an enormously expensive place in which to live and work. And if anything, the relatively high inflation that has plagued the national economy in recent years has exacerbated the angst that Californians were already feeling as they struggled to make ends meet.

Gov. Gavin Newsom’s crusade against gasoline refiners, accusing them of price-gouging, exploits that angst by virtue signaling to his constituents that he’s sympathetic to pain in their wallets. However, the state’s high fuel prices are just a tiny fragment of the state’s high cost of living and its corrosive effects.

How high? Insure.com, a website that analyzes insurance costs, recently updated its comprehensive, state-by-state guide to living costs of all kinds, and revealed that it costs 46.8% more to live in California than the national average – the third highest behind Hawaii’s 85.5% and 54% in the District of Columbia.

Its high cost of living is the single most important reason why California, despite its world class economy, has the nation’s highest rate of functional poverty, as measured by the U.S. Census Bureau. Its supplemental poverty index is weighted for the cost of living and California’s high costs, especially for housing, drive the state’s ranking.

Moreover, when the near-poor are added, well over a quarter of Californians are suffering from serious economic stress, according to the Public Policy Institute of California.

High living costs, again particularly for housing, are also a major factor in California’s outflow of population to other states and thus its recent loss of population.

“Since 2015, California has experienced net losses of over 500,000 adults who cite housing as the primary reason, according to the Current Population Survey,” PPIC fellows Hans Johnson and Eric McGhee noted in a recent report. “About half of those who leave the state buy a house in their new state, whereas only one-third of those moving to California buy a house.”

California is several million housing units – the exact number is often debated – short of what it needs to house its people, even despite recent population drops. Despite much ballyhooed efforts at the state level to increase production, the gap between supply and demand remains largely unchanged, thus putting upward pressure on rents and home prices.

According to the World Population Review, California’s average rent, $1,586 a month, is the third highest in the nation, topped only by Hawaii and the District of Columbia, and also third highest behind those two markets in median home price at $538,500.

High home prices make ownership an impossible dream for millions of California families, thus explaining why the state has the nation’s second lowest level of families living in homes that they or their families own, 54.6%. New York is the lowest at 53.6%, thanks to New York City’s rental-dominated housing market.

A new study by Moneywise, a website devoted to consumer finance, reveals that first-time home buyers in California would have to cough up the nation’s second highest average down payment, $98,904, topped only by Hawaii’s $110,360.

California’s extremely high housing hurdles not only explain why so many residents are fleeing to other states, but why it’s so difficult for working-class families to build generational wealth via home ownership. It solidifies the state’s two-tier economy – white and Asian Californian majorities in its overclass and Black and Latino Californians dominating the underclass.

Political pontificating about gas prices really misses the point.

CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to Commentary.