A tool kit to close California’s housing gap – 3 A tool kit to close California’s housing gap – 3.5 million homes by 2025 Rated #1 Think Tank 2015 (private sector category) by the Global Think Tank Index, University of Pennsylvania CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited

California’s population is growing and incomes are rising, creating more demand for housing Net change in population, 2009–14, Thousand people Change in household area median income, 2009–14 Percent -2% 9% -12% 14% NOTE: Shaded regions represent 98% of state population; unshaded regions represent 2% of state population and lacked sufficient data SOURCE: US Census Bureau; McKinsey Global Institute analysis

But California has not built enough housing to meet rising demand Ratio of housing units added to population added Units per 1,000 people Population added 1,000 people Housing units added Number State New York 616 338,508 549 Nevada 406 179,542 442 Arizona 890 364,530 410 Massachusetts 352 140,578 400 Oregon 358 142,190 397 Washington 806 311,648 387 Texas 4,201 1,400,749 333 California 2,964 912,340 308 +78% SOURCE: US Census Bureau; McKinsey Global Institute analysis

49th In fact, California ranks Housing units per capita, 2014 Units per 1,000 people US average = 419 In fact, California ranks 49th out of 50 states in housing units per capita Utah fornia Texas Jersey York chusetts ington Nevada Oregon Arizona Florida consin Maine 50 49 47 43 41 37 36 35 33 30 8 7 1 State ranking SOURCE: US Census Bureau; Moody’s Analytics; McKinsey Global Institute analysis

We estimate that California would have to add 3 We estimate that California would have to add 3.5 million housing units by 2025 to meet pent-up demand and accommodate its growing population California’s housing supply gap, Million housing units 14.0 16.0 1.5 1.0 3.5 2.0 2.5 demand stock backlog by 2025 backlog by 2025 tion rates by 2025 Number of housing units needed in California to supply market at the same per capita rate as New York or New Jersey (i.e., 406 units per thousand people—still significantly less than US average) Additional units needed to supply California’s population growth through 2025 (at same per capita rate as New York or New Jersey) SOURCE: US Census Bureau; Moody’s Analytics; McKinsey Global Institute analysis

Rising housing demand, chronic undersupply, and escalating prices have led to a statewide housing affordability crisis Households in MSA unable to afford rent Thousand 30%1 57% 2,368 Across the state, nearly 50% of California households are unable to afford the cost of housing in their local market The problem is pervasive: In every housing market in the state, at least 30% of households cannot afford the local cost of housing In cities such as LA and San Francisco where housing prices are most disconnected from average incomes, nearly 60% of households cannot afford the local cost of housing 1 Number of households in MSA unable to afford the local cost of rent, as a share of the total number of households in MSA. NOTE: Shaded regions represent 98% of state population; unshaded regions represent 2% of state population and lacked sufficient data for analysis SOURCE: US Census Bureau; Zillow; McKinsey Global Institute analysis

The poor are hit hardest — but the middle class is squeezed, too Percentage extremely unable to afford housing2 Total California households Million Share of California households % Definition % of AMI Percentage unable to afford housing1 Income level Above moderate >120 6.1 49 5 Moderate 80 – 120 1.7 13 53 Low 50 – 80 1.8 14 96 40 Very low 30 – 50 1.6 13 100 97 Extremely low <30 1.4 11 100 100 1 >30% of income required to cover local cost of housing; 2 >50% of income required to cover local cost of housing. SOURCE: US Census Bureau; Zillow; McKinsey Global Institute analysis

In dollar terms, California’s housing crisis costs the state more than $140 billion in lost economic output per year Distribution of affordability gap $ billion per year 10.35 0.01 23.69 Annual housing affordability gap $50 billion Lost economic output per year $140 billion SOURCE: US Census Bureau; Zillow; McKinsey Global Institute analysis

To fix this problem, California could build more than five million housing units in “housing hot spots” — which is more than enough to close the gap Tool Potential additional housing units 000 Low High Build on vacant urban land that cities have already zoned for multifamily development 103 225 Intensify housing around transit hubs 2,989 Add units to existing single- family homes 793 Add units to underutilized urban land zoned for multifamily development 993 Develop affordable and adjacent single-family housing1 Total 2,856–5,614 1 Estimate for single-family potential capacity is highly conservative as it examines only three counties: Sacramento, San Bernardino, and Contra Costa. SOURCE: McKinsey Global Institute analysis

To close the housing gap, California needs to change the rules of the game for housing approvals, cut the cost and risk of producing housing, and ensure housing access Change the rules of the game for approving housing on high-potential land Ensure housing access Remove barriers to housing development Ensure housing access Design regulations to boost affordable housing while maintaining investment attractiveness Incentivize local governments to approve already planned for housing Prioritize state and local funding for affordable housing Attract new investors in affordable housing Accelerate land-use approvals Unlock supply by cutting the cost and risk of producing housing Unlock supply by cutting the cost and risk of producing housing Raise construction productivity Accelerate construction permitting Align development impact fees with housing objectives Deploy modular construction Reduce housing operating costs SOURCE: McKinsey Global Institute analysis