Aerial view of South Lake Reservoir in California, depleted to dangerous level
California has long had a glamorous draw to people all over the world, from the glitz of Hollywood to the cutting edge of Silicon Valley. People have been flooding into California since the gold rush of the mid-1800s, but it’s entirely possible that California simply can’t support 40 million human lives and the country’s largest agricultural output.
Now in the fourth year of drought, California lost over a million acres of farmland last year. As a short-term emergency measure, the state has been pumping water from ancient underground lakes and aquifers – roughly half of California’s water came from these reserves last year. But the reserves are from water that fell 15,000-20,000 years ago, and are at record lows already. It takes centuries to refill water at the depth where it’s currently being pumped.
The problem is not abstract; wells that historically worked at 500 feet must now be drilled to 2,000 feet in many parts of the state, which is not only pulling the last reserves of water from the ground but are also prohibitively expensive to install.
The state's largest agricultural water authority organization, the Central Valley Project, has already reversed promises to provide water for one million acres of farmland, and statewide California is expected to be able to deliver only 20% of the water it had originally promised farmers.
With arable farmland shrinking, there are fewer crops grown and sold, and less demand for farm labor. That means fewer farmers and fewer farm jobs.
Governor Brown's current policy of scaling back water usage by 25% does not yet apply to farmers, but the overwhelming majority (80%) of the state's water usage is in agriculture. Raising water prices would help dampen personal water use (for example watering lawns), but in order to have any real impact California will have to either slash availability or raise water prices for farmers, who may not be able to stay in business.
The Dust Bowl of the 1930s offers an eerie reminder of what happens in agricultural economies that suffer prolonged drought. Farmers and laborers fled the countryside to cities, only to find that there was no surplus jobs for them there either. Crops failed, and food prices spiked. There is growing evidence that drought will cause the next round of inflation, not the Federal Reserve.
What does all this mean for housing demand and prices?
More rural areas will see demand drop first, as there are simply fewer opportunities for making a living in the agricultural sector. Very literally, the ground is sinking in parts of the Central Valley, as water reserves are pumped from underground. The Central Valley has already been suffering economically for several years now, with cities like Stockton, Modesto, Bakersfield and Madera trudging along at double-digit unemployment.
But high-cost, limited-availability water will hurt coastal cities too. A family subsisting in Los Angeles may not be able to afford expensive water bills on top of their high rents. If previous employees of the agricultural sector arrive in cities like San Diego and Los Angeles looking for low-pay work, that will drive wages lower for low-skill workers, causing double pressure from both lower wages and higher utility costs. Rents in these cities presumably don’t decline despite the spike in evictions, because of the influx of demand for cheap housing.
Still, housing supply may be affected. Stanford history professor Richard White ponders “It’s going to be harder and harder to build new housing without an adequate water supply. How many developments can you afford if you don’t have water?”
Farming is not the only industry that requires plenty of water, either. Manufacturing plants, golf courses, car washes, water parks and other types of tourism and a hundred other industries rely heavily on water availability and affordability. How many businesses will need to cut back on employees or even fold when water rationing and price spikes become a necessity? How many jobs lost?
There are still options available for increasing water supply in California, ranging from desalination plants to building out canal infrastructure to take water from neighboring states. But these are expensive options, requiring massive investments of public money, and California already charges among the highest tax rates in the country. These infrastructure projects also take years (if not decades) to fully build out, and will provide no immediate relief to residents and farmers.
When the proverbial dust settles, it is entirely possible that the drought will have a normalizing impact on housing. Perhaps California’s population growth will slow (or reverse in some areas) to more stable levels, as water becomes increasingly scarce and expensive, and demand finds more equilibrium with housing supply. But even if the end result is stabilization, it will be an excruciatingly painful road there for many Californians.