Home prices are important to the California economy for a number of reasons. In the short and medium terms, home price increases often drive construction activity, which in turn spurs employment growth in a wide range of sectors. In the longer term, chronically high housing costs have hurt the state’s business climate and been a key reason California loses residents to other states on net in most years.
May 2021 data show rapidly accelerating home price growth in both California and the rest of the country over the past year: the typical home in California has appreciated 15.4 percent since May 2020, somewhat above the national figure of 13.2 percent. These are the highest 12-month growth rates in the state since 2014 and in the nation since at least 1996. High framing lumber prices, low interest rates that make monthly mortgage payments more affordable (all else equal), and low inventory levels have contributed to the price increases, and the pandemic-driven shift to remote work may also be driving home prices up.
The next figure shows the month to month change in home prices in the state and the nation. In both cases, home price growth has accelerated in each of the last eleven months. In May, both the state growth rate of 2.42 percent and the national figure of 1.70 percent were the highest monthly growth rates recorded in Zillow’s entire database dating back to 1996.
The slower home price growth that prevailed in 2018 and 2019 made a minor dent in the affordability gap between the state and the rest of the country. Housing in California has always been relatively expensive, and the gap has widened considerably since 2012. Previous recessions have had disparate effects on home prices: they were largely unaffected by the collapse of the dot-com bubble in 2001, while in the late 2000s the collapse of the housing bubble was the single biggest factor that led to the financial crisis. Recent evidence shows the affordability gap widening again.
The graph below shows appreciation over the past 12 months for the state’s 15 largest counties, and suggests that the shift to remote work has been a key factor in recent price changes. San Francisco has long been northern California’s largest business hub, and historically a large share of its work force has commuted in from other counties. With remote work becoming more common, there is less of a premium on living close to the office and as such home prices in San Francisco have stagnated while prices in most counties from which large numbers of people commute into San Francisco have risen significantly. San Francisco’s average home price is roughly unchanged over the past year, and neighboring San Mateo is up just 6.4 percent. All the other large counties in the state are up at least 10 percent, and all but three of those are up at least 15 percent.