California’s unaffordability problem

Pundits often complain about the high cost of living in California, but rarely present the numbers in a rigorous way. This section uses the best available evidence to put some hard numbers behind claims of unaffordability.

The U.S. Bureau of Economic Analysis (BEA) estimates cost of living by state and metro area in its Regional Price Parities (RPP) data series. The national average price level is set to 100, and RPP scores indicate costs relative to the national average. So an RPP score of, say, 115, indicates costs 15 percent higher than the national average.

In 2023, California’s state-level RPP was a U.S.-leading 113, indicating 13 percent higher costs than the national average. If we compare California to other “blue” states (measured here as states that Democrats carried in the 2024 presidential election), it is still significantly higher-cost. California is 9 percent more expensive than the median blue state, and 7 percent more expensive than the median coastal blue state.

Since the BEA’s cost of living index was first compiled in 2008, California has consistently ranked near or at the top. However, California’s cost problem, even relative to other states with their own affordability issues, has grown steadily worse. Between 2008 and 2017, California was, on average, 14 percent more expensive than the median state. This bumped up to 18 percent, on average, between 2018 and 2023.

Costs in California are high across the board. But the disparity is particularly large for housing and utilities. As of 2023, housing costs in California were 88 percent higher than in the median state. Utilities costs were 58 percent higher.

California’s housing costs have long led the nation, but the utilities cost premium is relatively new. Utilities costs were only 25 percent above the median state in 2008. California’s utilities premium climbed steadily from 2008 onward, and accelerated following 2020. As we discuss in the next installment, a major contributor is the rising cost of electricity — driven mostly by wildfire mitigation spending and rooftop solar subsidies.

In addition to their high costs, housing and utilities comprise a large portion of expenditures for California families, particularly for those with modest incomes. According to Bureau of Labor Statistics (BLS) data, roughly 38 percent of household expenditures in California go towards housing and utilities. That share rises to 44 percent for Californians in the bottom 40 percent of the income distribution.

California’s high incomes help explain California’s relatively high costs. California’s median household income, just over $100,000 in 2024, is one of the highest in the country. Higher incomes can draw migrant inflow from other states, boosting demand for housing, and putting upward pressure on prices in the absence of supply growth. Higher incomes also mean higher labor costs, which can contribute to consumer costs. And of course, higher incomes mean Californians, at least at the upper end of the income distribution, can afford California’s relatively high costs.

Yet, even among high-income states, California is a cost of living outlier — especially when it comes to housing. New Jersey, Massachusetts, and Maryland all have higher median incomes, but lower cost of living. Even Hawaii, another state with beaches and good weather, has similar levels of income, but lower costs.

Figure 2 shows the relationship between metro areas’ median household incomes and their RPP (cost of living) level, with California metro areas (MSAs) appearing in blue. California MSAs cluster on the higher end of the median income measure, but they are almost all more expensive than similar areas in other states. This is true at the lower range of incomes, in places like Bakersfield, and at the higher end, in places like San Francisco. The only exception is San Jose, with its outlier levels of high income and relative affordability.

Of course, the problem of high costs is likely to be especially acute for those with lower incomes. Thus the problem of unaffordability is worsened by the fact that California has become one of the U.S.’s most unequal states. While real wages in the 90th percentile have risen nearly 50 percent since 1980, real wage growth has been sluggish at the median and below. Once inflation is accounted for, median wages for California workers have only risen around 7 percent since 1980, and wages at the lower end of the distribution have risen even less.

The growing gap between costs and incomes means that homeownership is now out of reach for most Californians who do not already own their homes. According to California’s Legislative Analyst’s Office (LAO), to qualify for a mortgage on a mid-tier California home in 2025, a household would need income of $221,000 This is over twice the state median.

Californians also generally struggle more than residents of other states to afford their basic needs. The Economic Policy Institute (EPI) produces estimates of the income required for a family to attain a modest yet adequate standard of living in each U.S. metro area. We can compare these estimates to median household incomes to measure affordability. According to EPI’s 2025 data, in only 30 percent of California’s metro areas is median household income greater than estimated costs for a two-parent family with one child. This compares to 67 percent of metro areas outside of California. Though these data are not perfect, they provide a general, and striking, picture of California’s affordability deficit.

Inability to afford or access basic needs is the definition of poverty. California, with its superstar cities, world-leading tech and entertainment industries, and progressive politics, may not immediately come to mind as a place with a poverty problem. It should. Remarkably, once cost of living is factored in, California has the highest poverty rate of any U.S. state.

The Census measures U.S. poverty in two ways: the official poverty measure (OPM) and the supplemental poverty measure (SPM). The OPM simply compares pre-tax income with a minimum food diet, adjusted for overall inflation. The SPM, which was first computed in 2011, takes post-tax income plus federal government programs, and compares it to the regional cost of living. This provides a much more accurate measure of poverty.

Using the simple OPM, California looks like a medium-poverty state. In the latest data, a rolling average from 2021-2023, the poverty rate was a middling 11.7 percent. Once the cost of living is accounted for, however, California’s poverty rate shoots up to 15.4 percent — the highest in the nation.

PPIC and the Stanford Center on Poverty and Inequality have their own cost of living-adjusted measure of poverty in California that accounts for state-level social safety net benefits. By their measure, as of 2023, 17 percent of Californians were living in poverty, and an additional 18 percent were near-poor, meaning their resources amounted to less than 1.5 times the poverty line.

The PPIC and Stanford measure of poverty highlights an important fact: While California has a relatively generous social safety net by U.S. standards, it is still no match for the state’s high cost of living. The state is systematically failing to protect Californians from poverty.

People migrate away from places where they are denied economic opportunities. Historically, this made California a magnet for migrants. Now, in a striking reversal of these historical trends, the inability to afford to live in California is driving people away.

California grew steadily from the end of WWII through the turn of the century. Its growth continued from 2000 to 2020, albeit at a slower pace. In this period, continued growth depended on international arrivals and the inflow of highly-educated workers. However, the departure of middle-income households, families with children, and retirees turned net domestic migration negative.

This trend accelerated after 2020. Between 2020 and 2024, California had the second-lowest net-migration to/from other states, as a percentage of the population, following only New York. In this period, California gained around 930,000 international migrants on net, but lost nearly 1.5 million domestic migrants. This isn’t solely an exodus of the wealthy to lower-tax states: California is losing high-income earners, middle-income earners, and low-income earners.

Survey evidence suggests that the high cost of living is the primary driver of this out-migration. In 2023, PPIC asked a representative sample of Californians: “Does the cost of your housing make you and your family seriously consider moving away from the part of California you live in now?” Overall, 45 percent of Californians reported they were seriously considering moving due to high housing costs. The share was over 56 percent among renters, and over 50 percent among Californians under 40. 34 percent of residents reported having seriously considered moving out-of-state due to high housing costs. This was up from just 15 percent in 2004.

In this first installment of our series on making California more affordable, we have documented California’s unaffordability problem, and highlighted its disturbing impact on poverty and out-migration. In the next, we begin to examine why California has this problem, and what to do about it. Our focus is on policy measures that are within state and local governments’ control, though we recognize that these are not the only factors at play.

For one, high incomes and natural amenities make California a desirable place to live, putting upward pressure on housing prices. Engineering a lower cost of living by neutering California’s top industries or destroying its natural beauty would be a terrible mistake.

Broader economic trends and federal policy decisions also affect unaffordability in California. The Trump administration’s tariffs are increasing living costs across the country. Cutbacks to the social safety net under the One Big Beautiful Bill also reduce critical sources of aid. Higher interest rates — a global economic phenomenon — are making it harder for Californians to afford to buy homes.

Yet, despite these factors outside its control, our analysis indicates California policies merit considerable blame. The good news is this means that policy and governance reforms could make California a much more affordable place to live.

The next installments in this series will focus on policy shifts that can, over time, make California more affordable. Our next white paper will specifically target the cost side of the affordability equation.

We will advocate policy shifts that target what are, in our view, the two primary policy determinants of California’s relatively high costs:

1. Restrictions on growth
2. Regulations promoting safety, sustainability, or quality that increase the cost of essentials

The biggest driver of California’s unaffordability is the housing shortage triggered by high demand to live in superstar metro areas, combined with restrictions on growth. High earners are drawn to coastal California, and outbid middle- and lower-income Californians for homes. Middle- and lower-income earners are pushed inland, driving up demand and prices in those regions as well. The primary solution is increasing the housing stock, but the policy reforms needed to get there can be difficult to get right given the fraught politics.

Many restrictions on growth and regulations promoting safety, sustainability, or quality provide important benefits. Others, however, generate minimal benefits and substantially increase costs across a range of areas, including housing, energy, transportation, and childcare. We will outline policy pathways to better balance affordability with concerns relating to growth, safety, sustainability, and quality. We will also analyze the political challenges these pathways are likely to encounter, and propose strategic and institutional measures that can surmount political obstacles and help to promote enduring and broadly beneficial policy change.