So, in researching the link from sbi, I think he's got one piece of the puzzle, but there seem to be a few more.
- Juan de Fuca (the same guy from whom the straits around Vancouver Island / the Seattle area are named), had claimed to have found a Northwest Passage
- Sailors from the south had also found the Gulf of Baja California, and frankly its big - so big that it would have been real easy to say, 'Oh, that's Juan's strait'
- There was the romance novel Las sergas de Esplandián by Garci Rodríguez de Montalvo, mentioned above.
Put them together, and you have an island.
Given the resources at the time, and a surfeit of targets for exploration, it makes sense they would have said, 'This is an island, we'll get around to mapping it later.'
That this was not an island was realized in 1744, when an overland expedition proved it be part of the mainland.