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The California problem is not a housing shortage; it’s income inequality

To continue along this provocative path, California’s problem is not a scarcity of housing or even a scarcity of affordable housing. The problem is income inequality. We have workers who are essential to the economic well-being of the state who can hardly afford to live in decent dwellings, not to mention a pleasant little bungalow within an hour’s drive of work.
San Jose’s solution to this problem has been to have its low-paid ($100,000 a year or less) service workers live in far away inland communities and commute long distances every day to work. That worked when San Jose businesses could afford to pay premium wages to compensate their workers well enough that they would be willing to live this way, but this solution may not work for California as a whole, since we may price our workforce out of the competition with other states. That wasn’t an issue in the Internet Rush, when companies were willing to bear any cost to benefit from the agglomerative externalities of Silicon Valley, but in the increasingly cost-conscious period ahead, more Northern California companies may be forced by competitive pressures to find locations out of the state where rents for dwellings are lower and workers more affordable.

What lies ahead? No burst yet.

House prices are of interest to you and me as home owners/buyers, but what matters for the economy is residential investment: new homes and improvements to existing homes. A collapse of this component of GDP has always led the way into recessions, has contributed directly about half of the GDP reduction, and more indirectly. This sector is absolutely critical in the next several years. Can it keep percolating along, or will we have a long overdue "consumer cycle" led by a collapse in residential investment?

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* Edward E. Leamer,
Director, UCLA Anderson Forecast.
Check the link for author's profile: http://www.anderson.ucla.edu/faculty/edward.leamer/pdf_files/cv.pdf