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How Will California Overcome High Living Costs, Poverty, and Debt?

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Californians have a unique combination of high living costs, poverty rates and debt. The next recession is likely to bring more stress resulting in mortgage defaults. (AP/Rich Pedroncelli)
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As most Californians know from personal experience, their state has an especially high cost of living, particularly for housing.

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Dan Walters

CalMatters

Opinion

Forbes magazine rates California as having the nation’s third-highest living costs behind Hawaii and Massachusetts, with $53,171 a year in average household spending for housing, healthcare, taxes, food, and transportation.

California also has the nation’s fourth-highest level of income disparity, which explains why it also has the nation’s highest level of poverty in the Census Bureau’s supplemental calculation, which factors in the cost of living.

The Public Policy Institute of California, using a similar methodology, found that nearly a third of Californians are living in poverty or near poverty. PPIC also says that without state and federal safety net programs, many of which were enacted in recent years by Gov. Gavin Newsom and a Democratic Legislature, the state’s poverty rate would climb by more than eight percentage points.

Perpetual Debate Over California’s Spending

These data are the grist for perpetual debate in California’s political, media, and academic circles over causes, effects, and remedies, and the conversations will be heating up this year. The state faces multibillion-dollar budget deficits well into the future due to what appears to be a semi-permanent plateau in revenues that cannot cope with sharp increases in spending during Newsom’s governorship.

Advocates for the poor and their legislative allies are pushing Newsom and legislators to protect the safety net programs from cuts as they confront the deficit, but they will be competing with other spending categories that enjoy heavyweight political support, such as K-12 and higher education and prisons.

There’s another aspect to California’s high living costs and high poverty rates – high levels of debt that have gotten scant media and political attention.

The Burden of High Housing Costs

Americans have amassed $17.3 trillion in home mortgages, auto loans, student loans, credit cards, and other forms of personal debt, according to the Federal Reserve Bank of New York. Californians owe at least $2.5 trillion of that and perhaps as much as $3 trillion, thanks largely to its high housing costs and the large mortgages needed to handle those costs.

In fact, according to a newly released study by CreditDonkey, a personal finance website, Californians are carrying the most debt of any state, driven by an average mortgage of $422,909 for homeowner families.

Californians’ debts for student loans, auto loans, and credit card balances are also fairly high, although not terribly so vis-à-vis other states. It’s mortgage debt, at least $2 trillion, that truly sets California apart from other states, although a third of the state’s homeowners don’t have mortgages.

That said, Californians seem to be handling their high debts fairly well. The state’s personal bankruptcy rate is well below the national average and a fraction of those in states, mostly in the South, with sky-high rates. However, the PPIC, using census data, found that a million of California’s 9 million renters are behind on their rent.

California’s unique combination of high living costs, high poverty, and high debt makes the state something of a personal finance experiment. The test will be how people fare during the next recession.

During the Great Recession, California had one of the nation’s highest levels of mortgage defaults and repossessions, and it took years for the housing industry to climb out of the cellar.

About the Author

Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He began his professional career in 1960, at age 16, at the Humboldt Times. CalMatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more columns by Dan Walters, go to calmatters.org/commentary.

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Dan Walters has been a journalist for nearly 60 years, spending all but a few of those years working for California newspapers. He has written more than 9,000 columns about the state and its politics and is the founding editor of the “California Political Almanac.” Dan has also been a frequent guest on national television news shows, commenting on California issues and policies.

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