In my previous post, I proposed building a large new city at Camp Pendleton (between Orange and San Diego counties.)
One commenter suggested that this was not a good location:
I don’t know. The new city would still be in California, with all the excessive state regulations. And I expect it would be just as expensive to live there as all the other coastal California cities.
I share with many conservatives and libertarians the view that California is a rather poorly governed state, which is adversely affected by a wide range of counterproductive progressive policies. But I interpret that claim in a very different way from many other people on the right. And I plan to show that I’m right and they are wrong.
Here are two categories of bad California regulations:
1. Progressive policies such as rent controls, school closures, excessive state spending, picky business regulations, poor control of crime in places like San Francisco, etc.
2. A wide range of zoning and permitting rules that make it exceedingly difficult to build housing (both dense urban housing and suburban housing in greenfield developments.)
The first category includes a large number of bad policies, but the second category may be far more important, at least in aggregate. How do I know this? Consider the impact of each policy category on California housing prices. The first group of regulations makes California a less desirable place to live, and hence depresses housing prices. In contrast, the regulations that constrain new construction tend to reduce supply and thus boost California housing prices. The market (high house prices) is telling us that the second issue is more important and that California is an excellent place to build a new city, despite all of the regulatory problems. Indeed to some extent, it is a good place to build a new city because of the severe regulatory constraints in category #2.
When we bought a home in Orange County back in 2016, its value was about the same as the Boston area home where we were living. Today (according to Zillow), our Orange County home is worth far more than the Massachusetts home that we vacated. Its value has increased by 80%, vs. 40% in Massachusetts. So why are homes in California worth so much, and still rising rapidly in value, if the state is a dystopian hell that everyone’s fleeing for Texas and Florida?
The answer is simple; California is still a very appealing place to live for many people. And those “many people” are often individuals with fairly high incomes.
As a reader of the news media, I’m aware of many of the problems with governance in California. But in terms of my day-to-day life, governance problems don’t affect me very much at all:
1. The roads here in OC are much better than back in Boston.
2. The University of California (which my daughter attended) is far better than the University of Massachusetts.
3. I don’t have to go through the annoying vehicle inspection process each year, as I did back in Boston.
To be sure, some things are worse. The home insurance industry is over-regulated, resulting in far higher premiums than in Boston. I suspect the health insurance industry is also poorly regulated, but I’m not an expert in that area. Small business owners face lots of intrusive regulations, as do landlords. Taxes are higher. San Francisco has lots of petty crime. Covid regulations were often quite foolish (but did not impact my life at all.)
Nonetheless, I think conservatives are making a mistake when they suggest that Californians are fleeing a dystopian nightmare. The very high price of homes in this state suggests that the overall quality of life here is the highest in America. You may know someone who sold their California home and moved away because they hated California, but someone else bought that home for a very high price. Instead, the lesson conservatives should draw from California is that America’s biggest problem is foolish barriers to homebuilding that prevent millions of people from moving to places with exceedingly high living standards. You might wish to believe that California is a dystopian nightmare, but the housing prices suggest exactly the opposite. The biggest problem with California is that far too few people live here.
In January, I drove around both coasts of Florida. More recently, I visited the SF Bay Area and then drove back down to Orange County, stopping at various places along the way. The SF Bay Area, Monterey, Santa Barbara, Ventura County, West LA, Orange County, and San Diego are some of the best places to live in the entire world. The Inland Empire is less attractive, but still no worse than much of Arizona or Nevada. Florida is far less attractive than coastal California.
This does not mean that California has a better state government than Florida. In terms of economic regulations, Florida is much better managed. I attribute the success of California to two factors. First, it has a great climate and beautiful scenery. That attracts people. (Florida has a good climate but ugly scenery.) Second, it attracted important 21st century industries before the state was taken over by progressives. Through a combination of good natural amenities and the benefits of agglomeration, they’ve been able to hold onto those creative industries despite a deteriorating regulatory environment. High skilled people also tend to be socially liberal, and California is very socially liberal. Indeed it’s considerably more libertarian on social issues than even places like Massachusetts (which still has a puritan streak).
When my commenter suggested that the new city would be just as expensive as other coastal cities, he was right. (Although it would slightly reduce prices throughout the region.) But he misunderstood the implication of that fact. If 500,000 Americans want to build million dollar homes in my new city of Pendleton, that means the new city would have great value to America.
PS. Let me anticipate some comments. You will tell me this or that bad thing about California. I will agree, but argue that the high housing prices show the good outweighs the bad.
PPS. I don’t like the name Pendleton for my proposed new city. How about Utopia, CA? Or “Irvine 2.0”, after the company that built the city with arguably the world’s highest living standard for cities with more than 250,000 people? Or (given the current drought) Greenland? 🙂
PPS. Florida has a nice climate, but California is sublime:
READER COMMENTS
David Henderson
May 19 2022 at 6:25pm
Good post. Got me thinking. I think I’ll stay. 🙂
Variant
May 19 2022 at 6:49pm
You make a persuasive case. I stay in California because of the weather, because of my job (high salary tech) and despite the politics, high costs and over-crowding. I’ll say that the last few years my calculus has truly been stressed and, as demonstrated by California’s recent net loss in population, others are reaching the same point.
There’s certainly a continued demand for housing and an appetite to pay the high prices asked.
MikeW
May 19 2022 at 6:57pm
California is unappealing to me because the cost of living and the population density are both so high. Clearly I’m in a minority in preferring a lower population density. I do think the very high cost of living, and especially of housing, is an important factor in causing some people to leave the state. It’s hard for me to see how all the low-income workers are able to get by there.
Scott Sumner
May 19 2022 at 7:09pm
I suspect there is a sorting process where people that don’t like those factors are replaced by people like me. I wish OC had more people. A bigger population makes a place have more choices for restaurants, entertainment, etc.
Aaron W
May 19 2022 at 9:59pm
I don’t think that a personal preference for low versus high density is really an issue. It’s that a central planner will not be able to correctly predict the aggregate individual preferences for either. The high prices of housing in high density areas is sending a signal that demand is greater than supply.
Monte
May 19 2022 at 7:36pm
You would desecrate this hallowed ground, saturated with the blood, sweat, and tears of current and former marines who tested the limits of human endurance preparing for war, and endanger the California gnatcatcher in the process, with urbanization?
The legacy of Chesty Puller and the EPA will never allow it.
Pete S
May 19 2022 at 8:45pm
This is a very good piece.
There are 39 M Californians for a reason as you say.
Perhaps many people would say that California is still living off the good government it had in the past.
Perhaps part of the problem with housing is that California has built two metropolises, LA (~20M) & the Bay Area (~10M) that are now so large that people don’t want more people any more, which is of course driving up housing prices.
Building out is the cheapest way to expand a city to these sizes but the transition to building up in some areas isn’t free. The cost per square meter of high rise housing is also about twice the cost of low rise.
Houston’s approach does seem to work. The new apartments that are going into central Houston seem to show that the transition to higher densities works better without costly zoning.
Randal O’Toole is an interesting read on these subjects.
As MikeW says the issue for CA might be what happens if it’s just too expensive for low wage workers.
Scott Sumner
May 19 2022 at 10:48pm
It is more expensive to build up, but in California it would still be highly profitable were it not for the burdensome regulations.
Johnson85
May 20 2022 at 11:13am
You really don’t have to build up much in most places to greatly increase density. Just based on quick google searches, it looks like San Francisco has about 30 residents per acre (that’s gross). This site shows some different density developments.
https://www.theurbanist.org/2017/05/04/visualizing-compatible-density/
Kind of hard to convert because some of them are gross densities and some or net densities, but it would be pretty easy to envision getting to 20 dwellings per acre gross (which if an average of 1.5 people live in each dwelling, gets you to San Francisco’s current population) without any high rise and not that much midrise. Granted, if you are only going to be able to redevelop limited land, you probably need high rise to move the needle, but properly designed buildings that are just 3 to 6 stories tall can get pretty good density and I don’t think bother people as much.
Ben Y
May 19 2022 at 9:27pm
Isn’t it also possible that the high prices are caused by more restrictions on construction compared to other states?
Scott Sumner
May 19 2022 at 10:49pm
It’s the combination of barriers to construction and lots of people wanting to live here. The same construction barriers in Oklahoma City would not cause ordinary homes there to cost $1,000,000.
Aaron W
May 19 2022 at 9:56pm
I think this gets at a good point about regulations that often gets overlooked. While it’s true that many of the misguided progressive regulations in California impose costs, these costs are small in aggregate and unlikely the major culprit in causing people to move away. There’s one big set of regulations that are the primary driver of this, which are zoning, building codes, and superfluous environmental reviews. Having lived in California for 16 years, the primary reason that people leave isn’t “Those out of control progressives!”; these people are often quite progressive themselves (see: Arizonans complaining about Califorians moving in). It’s almost invariably, “I love California, but housing is too expensive.” You’d never pick up on that if you spent all your time understanding the issue through the lens of culture war conflict and the relative status of particular supposed “red” and “blue” states.
As such, sometimes I think the focus on regulation in general rather than very specific sets of particularly bad regulations is a mistake. You’d be able to convince non-true believers of the libertarian cause (i.e., most people) if you can connect a bad outcome to bad regulation. These problematic regulations exist in states other than California, as evidenced by large price increases elsewhere.
Oscar Cunningham
May 20 2022 at 5:58am
It’s not like you to use the present continuous tense to refer to a market. All you can say is that prices have recently risen rapidly.
David Henderson
May 20 2022 at 11:47am
Good point. When I’m interviewed and an interviewer asks me to account for the rising value of the dollar, I tell him or her that the best I can do–and I can’t always do that–is account for why the dollar rose.
Scott Sumner
May 20 2022 at 4:02pm
Fair point. However housing markets are a bit less efficient than financial markets, and housing price changes do show a bit of momentum.
On the other hand, given the recent stock price decline we might be at a turning point. So I may be wrong in this case.
Tom Grey
May 25 2022 at 2:05am
Isn’t it also possible that, as folks sell in the stock market and look for alternative non-stock investments, they conclude that housing in desirable areas remains a lower risk?
Christophe Biocca
May 20 2022 at 8:06am
Are you reasoning from a price change? All you can really say is there has been a disproportionate shift between supply and demand.
And we can measure demand factors (who’s moving in/out) directly. The stories “California is still attractive to people on net” and “California loses people to other states on net” are actually both true. California has had net-negative internal migration with other states (of about 150,000 people per year) for the entire 21st century. But this is less than the combined positive impact of international migration and natural population growth. Or, at least, it was until 2021. Whether that’s a temporary blip or the beginning of a new trend is hard to tell.
Jason S.
Jun 16 2022 at 9:12am
Correct. So it is more reasonable to say that California is unappealing to the marginal resident but highly appealing to the average resident (especially incumbent homeowners!).
Zeke5123
May 20 2022 at 8:31am
The Florida Keys are nicer from a scenic perspective compared to anywhere (except maybe Big Sur) in California.
But I think people are moving to Florida and Texas because there is a sense of growth and opportunity whereas California (or the northeast where I live) has a certain feeling of “we’ve reached our zenith.” That is, it is a zeitgeist.
Of course people still live in the northeast and California and there is still a lot of money to be made and limited housing supply so home prices are high. But dynamism speaks to something deep in the human psyche which is why I think you are seeing outgrowth to Texas and Florida.
Zeke5123
May 20 2022 at 8:32am
(Granted you can’t live in the keys)
Scott Sumner
May 20 2022 at 4:04pm
I assure you that with less strict housing regulations you’d see rapid population growth in California. If you build the houses they will come.
MarkW
May 22 2022 at 11:15am
The Florida Keys are nicer from a scenic perspective compared to anywhere (except maybe Big Sur) in California.
Tastes obviously differ, but I find scenery in Florida to be limited in its appeal by the extreme flatness — and that applies even to the beaches (no near-shore elevation to provide scenic vantage points or interest in views from water level). Want to go for a nice hike or mountain bike ride? That’s just not happening anywhere in Florida. The list of places in California more beautiful than anything found in Florida is almost endless (start with all the national parks).
That said, if we were thinking of moving somewhere to retire, California wouldn’t be on the list, due to the housing costs, congestion, and generally screwed up policies. California has many beautiful places, but they’re so over-subscribed. Want to hike to the top of Mt Whitney? Get in the lottery. Want a camp site in Yosemite? Good luck. Washington, Oregon, Arizona, Utah, and Colorado all hold more appeal at this point.
Zeke5123
May 22 2022 at 11:47am
It really depends on your taste. Some people love the Caribbean and so the Keys are very attractive. Different strokes for different folks.
Also the Everglades are rather interesting.
MikeW
May 25 2022 at 12:36pm
“California has many beautiful places, but they’re so over-subscribed.”
I really agree with this. Everything is so crowded!
Lizard Man
May 20 2022 at 11:40am
“California is still a very appealing place to live for many people. And those “many people” are often individuals with fairly high incomes.”
Do Californians want anyone without high incomes to live there? My impression is that the people who leave California tend to have lower incomes than the people who move there. That fact has always made me think that progressives don’t really believe what they say about social justice, and that progressivism is mostly just virtue signaling devoid of an actual commitment to justice (or rationality).
Scott Sumner
May 20 2022 at 4:01pm
Good point. I suspect that a preference for less crowding tends to dominate social justice concerns.
CaliNice
May 22 2022 at 1:43pm
Scott,
I think that the tough zoning is actually the main factor in California’s desirability.
I’m not entirely sure that the climate is what is driving lots of people to California, as even the desert parts of the state and the areas without the Mediterranean climate are also expensive. My guess, is once an area gets expensive and low income people are pushed out(along with their social problems), then the area gets even more desirable to others, especially to high income people. This creates a feedback loop that goes until high income people’s wallets are stretched thin.
Not that all the low income people are pushed out, as there are lots of poor people in California, but poor people have to work very hard to afford rent in California, and many people with serious social problems(drugs, addiction, mental illness, criminality) tend to just be priced out of the state since they don’t care to put in the extra work to afford rent. The poor in California who survive high rents are much more law-abiding and pro-social than those that get priced out. Therefore, the more exclusionary the zoning, the more desirable the location. The reverse is true for cities becoming cheaper, with social problems rising the cheaper the rents, causing a negative loop with respect to demand.
Most importantly, exclusion via home rents and prices is immune to political shifts, since it is vastly harder to build more homes than it is to change laws. Defunding the police will have a much more limited impact in San Diego or San Jose than Houston or St. Louis. That makes the desirability more deep rooted compared to a state like Texas where the positives(low income tax, enforcement of laws), can easily be repealed by a democratic state government(which is more likely to happen than building tons of houses in CA).
That’s also why the homeless problem is so bad in California. California just doesn’t enforce rules very much, but that is mitigated by the fact that the high rents have kept enough people with issues out so the state’s social situation is on average better than it would be(TX has a higher rate of crime than CA). Homeless people circumvent the issue of high rents completely, so the lack of enforcement becomes the defining factor, hence why the state has such a severe problem
Scott Sumner
May 23 2022 at 1:54am
I think this does explain some of the NIMBYism, but of course it doesn’t justify it.
Good observation about the homeless.
Jeff
May 31 2022 at 4:21am
I have often heard this dictum that California immigrants are wealthier than emigrants, but I recently read an article which claimed the opposite, at least for the Bay Area. I had to read it a couple times to make sure I had it right. Interestingly, these stats were gathered even before COVID.
Any thoughts?
“those leaving this region for Las Vegas reported to the IRS average earnings of nearly $107,000 for 2018 and 2019; those arriving from there, barely $70,000. For those departing the Bay Area for Maricopa, it’s more than $140,000, v. $102,000 for arrivals. Travis County, Texas (Austin), had one of the widest disparities: more than $219,000 in average gross income for those moving there from the Bay Area; $80,000 less per year for filers doing it in reverse.”
https://www.bizjournals.com/sanfrancisco/news/2022/03/11/a-look-behind-the-numbers-of-the-bay-area-exodus.html
Jon Murphy
May 20 2022 at 12:01pm
I think your point about weather is important too. I love Boston. I love that dirty water. It is my home.
But the winters are long and cold. Southern California is amazing. That matters.
DeservingPorcupine
May 20 2022 at 4:07pm
I think this is generally correct, but I think there is a worry about hitting a tipping point very suddenly. The climate and environment will always be nice, but if more companies start exiting and/or allowing people to live elsewhere, the employment pull can weaken pretty fast.
Lizard Man
May 22 2022 at 2:58pm
I would expect relative decline, not absolute decline, especially if remote work grows. This is simply because I think highly paid remote workers will continue to want to live in California for the climate and scenery, so there will likely continue to be big industry clusters in Northern and Southern California centered around those workers. But it is possible that Austin grows to become the biggest IT tech city over the course of the next century.
Thomas Lee Hutcheson
May 21 2022 at 1:26pm
“The home insurance industry is over-regulated, resulting in far higher premiums than in Boston”
My impression was that the over-regulation (at least as it applies to wildfire hazard) results in premiums tat are too low???
Scott Sumner
May 22 2022 at 12:22pm
I believe that there must be cross-subsidization going on.
My complaint is that I’m forced to buy much more home insurance than I would prefer to buy.
Warren Platts
May 21 2022 at 2:54pm
Don’t get me wrong. I have lived in San Diego and Monterey — both very nice places. However, last I checked, U-Haul rates from San Francisco to Austin were like 4X higher than the rates from Austin to San Francisco. So it appears that people really are voting with their feet.
At any rate, at least for southern California, there are other limits to growth besides zoning regulations. Namely: water. If you build a brand new city with a million people in Camp Pendleton, where is the water going to come from?
There’s not even enough water for the people that already live there. Both Lake Powell and Lake Mead are at record low levels. So low, they won’t even be able to generate electricity if the water levels get much lower. I see they will be implementing 1-day-a-week watering restrictions in LA. Wildfires are worse than ever. The latest drought has gone on so long, this is looking like this is going to be the new normal. Nature has a say in what happens.
One can flip the logic of insanely high housing prices: they are as much a sign the place is overpopulated as that there is a shortage of housing.
Scott Sumner
May 21 2022 at 4:33pm
“So it appears that people really are voting with their feet.”
I addressed this in the post. The problem is high housing costs.
California has plenty of water, the problem is a dysfunctional pricing system that creates artificial shortages. The new city could also use desalinization.
JMCSF
May 22 2022 at 8:42am
Sadly, it seems like California politics would prefer their almond trees and dysfunctional water markets instead of desal.
JMCSF
May 22 2022 at 8:38am
I have always though that California is a great place to live. In past times it was great for everybody, in the last 20(30?) years I would say this is only the case for high income earners.
To Scott’s point, poor governance adds to the cost of living. Imagine your life with a household income in the following: under $100k, $100-$250, $250-500k, $500-$1m, $1m+. Which states would you consider under each scenario? I definitely would not live in CA with an income under $100k (although I already did and loved living there) but it’s near the top for the others IMO. Relatedly, I just spent some time in Austin. It’s a nice enough town but I don’t get the hype. 5 years ago when prices were much lower I could see it, but it’s not *that* much cheaper in 2022 than your large coastal cities. I’d choose lower cost CA cities (relative to SF) like San Diego or even Sacramento over Austin.
David S
May 22 2022 at 12:53pm
Scott, I initially bristled at your criticism of Massachusetts, but after a few seconds of reflection, I realized I’m in near total agreement with you. In fact, you could have been a lot harder on the New England climate, but I suppose growing up in Wisconsin made you tough.
I think that a lot of emphasis should be placed on regional differences within states, with California and Massachusetts demonstrating remarkable extremes with respect to cost of living and politics. Irvine seems to resemble many southern and midwestern states–see exhibit A: Kevin McCarthy.
The recent rejection of the desalination plant in Huntington Beach demonstrates some really deep stupidity on the part of regional officials. What’s the alternative? Rain dances? Human sacrifice?
Scott Sumner
May 23 2022 at 1:53am
Irvine is a lot more affluent than the midwest or south.
The water shortage is mostly due to the mis-pricing of water. But yes, NIMBYism here is a huge problem for both infrastructure and housing.
David S
May 23 2022 at 3:26pm
Scott, I messed up—I meant to say Bakersfield. I don’t know why I wrote Irvine. I apologize to everyone in Orange County; even the handful of people who still vote Republican there.
Tom Kirkendall
May 24 2022 at 9:14am
Interesting post. California’s coastal beauty and weather are certainly attractive attributes. A couple of observations:1. Wealthy people can afford to live in California. But what happens when the price to live there overwhelms the beauty and attractive weather for non-wealthy people who provide essential services for the wealthy people?
2. Increasing real estate prices can be deceptive. California has had its share of real estate bubbles in the past (see mid-1980’s, for example). As Hemingway reminds us in “The Sun Also Rises”:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually, then suddenly.”
David
May 24 2022 at 11:17am
I have lived in California almost my entire life. Adam Smith’s dictum that there is a lot of ruin in a nation is relevant. The weather and geography are so spectacular that people are willing to put up with a lot. Combine that with the geographic isolation. If you want to move, you don’t have the option of 50 miles away over a river. You have to completely uproot yourself from your friends and family, which is a huge obstacle. Compare to say, Tennessee, which has to compete with a dozen states for people and businesses.
MikeW
May 25 2022 at 12:31pm
From Matt Taibbi several days ago, but I just got around to reading it:
“As of last year the state boasted an astonishing 396,000 regulations, 100,000 more than its closest competitor, New York.”
MikeW
May 25 2022 at 12:52pm
https://taibbi.substack.com/p/the-lawyers-who-ate-california-epilogue
(might only work for subscribers)
Sweet Meteor O’Death
Jun 16 2022 at 9:14am
Pendleton would be an amazing location for a new city but I imagine large swaths are practically unusable due to the decades-long build up of unexploded ordinance.
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