1. 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
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2. 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

3. 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

4. 49th In fact, California ranks
Housing units per capita, 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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