I think you should go to the school that you liked better. It is true that it is easier to get a residency spot in CA if you are in school in CA, but only up to a certain point. The fact is, your performance in school matters a lot more than the school you came from. For example if you are AOA at the top of your class, from an out of state school, residency directors are definitely going to look at you over someone with lesser credentials, even if they are from a CA school. However if you are towards the bottom of the class and you are trying to compare yourself to someone in your same shoes at a CA school, they might have the edge because maybe they had a better chance of networking with local programs. The point I am trying to make is that residency directors want to recruit exellent graduates that are going to do their job the best. It matters a lot less that you came from a CA school, if you are not up to par with the rest of the applicant pool.
I think you have to decide what you want out of school, and realize that residency choice is entirely up to you. U Mich is an outstanding school, but USC isn't bad either, both schools would get you a solid residency in CA or anywhere else. Don't worry so much about residency, you have a lot of hard work ahead and you should focus on that first.
Also please take match lists with a grain of salt. Of course USC is going to have a lot of CA program placements, it's because most of the people that go there are from CA. If you look at UMich maybe 10-15 members of the class are from CA, and I'm sure those who want to go back do (excluding future ENT and Orthopods, becuase that's up for grabs for everyone).
Make the decision based on how you feel about each school's program, environment, location, and people. Best of luck.
