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I'm Lucia Riley, and I'm Roberta Fissara.
Whether a family chooses to rent or buy, we believe that their ability to do so that it is in an affordable way that meets their family's needs is actually critical to actually having a holistic dream that is America.
That's Mackenzie partner, JP Julian.
He's also a leader in the Mackenzie Institute for Economic Mobility.
Affordable housing has become a massive issue in the US.
And as the New York Times reported in March, federal officials created a task force to identify land that could be used for housing development.
We just released an in -depth report about that lack of affordable housing.
And in a moment, you'll hear the discussion JP and I had about it.
but first here's what's new on MacKenzie .com there's a report on the state of aviation in which we learn about the plight of low -cost airlines, aircraft shortages and how to modernize airline planning.
Also out is our annual report about private markets which continue to face uncertain conditions.
Both pieces can be found on our website and in our show notes and now let's dig into affordable housing with JP Julian.
J .P. welcome back to the podcast. Thanks for having me.
Today, we're here to talk about affordable housing.
In the U .S. the cost of just having a decent place to call home, which is kind of a key feature of what we call the American dream, is becoming out of reach for a rising number of American families.
And J .P. you have recently co -authored a report on affordable housing with McKinsey's Institute for Economic Mobility.
talk to us about what's going on with the current housing crisis if that's a fair description.
It is an apt way to put it.
In simplest terms, we have a massive housing shortage, and that crunch is really impacting family's ability to achieve more.
So in 2023, we estimated that there were 8 .2 million fewer units of housing than the market required to meet the needs of American families.
Without action, that number grows to 9 .6 million by 2035.
and the truth is, as big as that estimate sounds in numeric terms, it has huge and real implications for our economy and for every day families.
This gap is the reason why 40 million American households spend more than 30 % of their income just to find shelter.
So that's one in three households today that are spending nearly a third of their income, just to have a home.
It's the reason why homeownership is increasing out of reach for American families, And if you think about what that means in terms of families ability to build wealth but also feel secure and develop roots in a place, it has real consequences.
And when we're talking about access to safe reasonable quality housing, are we talking about buying homes or renting homes or both?
So we looked at both because we actually think it's helpful to think about this problem holistically and whether a family chooses to rent or buy, we believe that their ability to do so in an affordable way that meets their family's needs is actually critical to actually having a holistic dream that is America.
How and why does location factor into the economic mobility calculus for American families?
Place matters a lot.
If you think about what it takes to experience economic mobility, your address plays an enormous role.
So your proximity to a good job, your ability to access healthy foods, or a bank, or healthcare or healthcare, the school your kids have access to, or your exposure to violence, to what extent you have thriving green spaces around you, on the flip side, pollutants that negatively impact your health.
Increasingly, your risk of climate disaster, whether that's flooding, wildfires, hurricanes, all of those interconnected macroforces are really fundamentally shaped by where your housing is located.
And so, the truth is, because we have a lack of housing.
And we have a sub -optimal way of determining where housing gets built.
We create an artificial barrier for millions of families to really have the opportunity to achieve upward mobility by tying all of these other factors simply to their address.
Ross. Shaddie has the amazing work.
It seems like even your zip code can make a difference in the future trajectory of kids.
That's exactly right.
So, Shaddie's work on neighborhood conditions, but also, even if you'll other scholars, whether it's the heckman equation or the social genome project, all of those elements that are described in those bodies of work essentially say that the chances that the child experiences that accountability is fundamentally shaped by the conditions of the places in which they grow up and so housing has to be a fundamental lever that we are making impact against if you actually want to see changes in economic mobility outcomes.
And this is a national issue.
It's not just the so -called elite coastal cities like New York.
It is everywhere, unfortunately.
It's in New York City and in Philadelphia, I am, but also in rural America.
It's on the coast and it's in inland communities.
It is in communities that are majority black, white, native, Asian.
It is facing young adults, they're just entering the workforce, and retirees are thinking about their next horizon of life.
Did you find that some demographics were more affected than others?
We did. What we find is actually even relatives of some other economic ability outcomes.
Black Americans in particular are really hard -hit by our housing crisis.
And that's driven by two underlying factors.
The first is that black Americans are overrepresented in the places where housing gaps are whitest. The second reason is that black Americans are overrepresented among the lowest income Americans.
And as we see in the data, lower income Americans face the most downside impact of this housing crisis.
Okay. Obviously, collective wellbeing has long been a fundamental value in the United States.
And you've talked a little bit about economic mobility for the populations that are being It cases well to addressing the housing crisis.
There is the economic opportunity is quite massive.
As we estimate in the latest research, addressing that housing shortfall that I talked about, so that eight to nine million unit delta that we're facing over the next decade if solved, could unlock $2 trillion of GDP and create 1 .7 million jobs.
A real boon for economic growth.
And that's not even accounting for additional benefits, like what those new units would mean in terms of property taxes, that could support public investments like schools and infrastructure.
We also know that, while that's a big national number, it also have incredible impact and reverberate locally.
And so, some of what we did was actually to estimate, what does this look like for certain communities.
So, if you take a place like Chicago, for example, we estimate that, you know, solving this housing crisis locally in Chicago So, unlocks 30 billion of local GDP, and unlocks 27 ,000 jobs.
And so, to your point, the opportunity for impact here for the broader economy is quite huge.
So, let's turn now to what's driving the housing shortfall in the United States.
What are the causes of this crisis of affordable housing?
There are three big ones.
The first is the cost of land and construction.
So land is actually the single largest driver of our housing cost. And what we know is that we are artificially restricting what can be built on our Morse Scares resource.
So, 75 % of residential land in the U .S. for example, is zoned for single family use.
So you add that to the fact that we're also increasingly facing labour shortages and higher material costs, which you end up with is slower production at a higher cost. The second big one is actually just insufficient capital for affordable housing.
There simply isn't enough private capital being invested in affordable housing.
And part of that is because there is a bit more complexity with affordable housing finance.
But also because looking at its face, affordable housing has lower returns.
Returns are primarily driven by rents.
The higher rent you charge, the more return you essentially get as an investor.
What's often lost though is once you factor in the volatility, I am providing workforce or affordable housing in which people are actually able to sustain that over time, some of which is subsidized by the federal government.
On a risk -adjusted basis we actually see there's quite a bit of upside -to -for -fourable housing, but that story hasn't fully made its way through the sector.
The last thing I'll note is just there is not enough income and supports for families.
Particularly for the lowest income families that I talked about, They simply don't have enough income to a comfortably afford housing.
So more than half of them are cost -burdened today.
You tether that with the idea that ten plus percent of American households have no wealth or are in debt, including twenty four percent of black households.
There is both no question from a wealth perspective to absorb increasing housing costs, but then also not enough money coming in on a monthly basis to be able to support housing that is affordable and sustainable for those families.
J .P. Before we move to the solutions for some of these, I wanted to ask a little bit, for example, about zoning.
So, how are local zoning laws and, kind of, community — there can be — there's NIMBism and then there's YIMBism.
There's community support.
There's community opposition.
How's this sort of dynamic between local zoning laws and community?
the engagement, contributing to the issue.
Zoning is such a critical issue.
We highlight five types of solutions in the report.
Zoning is the first one on the list, and it's not because zoning doesn't work.
We actually know that it's quite effective.
So things like increasing single -family zoning to multi -family, or reducing parking minimums or a lot sizes, we know and have good examples that actually work in terms of increasing density and therefore a affordability of housing.
The challenge is that what works in one place does not work in another, and a big driver of that is this idea of local control of zoning.
So in some ways it's helpful that you as a homeowner in your community have a sense of what happens in that community.
So the fabric of the homes that are built, the nature of the density that happens, what is though left out is oftentimes you end up with either a small number of loud voices?
Or just not the right incentives for residents and or jurisdictions to adopt more housing -friendly zoning that would actually increase the number of units and therefore, the ability for people to afford that.
So increase density means more different kinds of families living in close proximity.
What we see in the research is that going to school with people at different incomes is actually better, not just for the lower income students, but actually for the higher income students as well.
we know that it leads to more diverse and interesting cuisines in places it tends to lead to more resources to do things like invest in our infrastructure so whether it's sidewalks or potholes it's more likely that you have a functioning and high thriving main street that more businesses are actually able to serve increased residents.
So is Zoning Reform largely a question of messaging, what these kind of housing friendly incentives might be, or there are specific incentives that we saw working that help to accelerate?
I think there's definitely a bit of narrative on what are the benefits as opposed to just the drawbacks of increase zoning that are worth spending time on?
The other things that we saw, So is there does need to be more incentive.
And so that incentive could live at the jurisdictional level.
How do you provide additional funding for local communities that decide to up zone, particularly up zoning around transit other assets?
And so we see examples of this in Massachusetts in Colorado, where they're essentially being given grant funding to increase zoning in ways that are beneficial to those communities.
The other idea that we play around with, which is much more than novel scale, doesn't not yet exist today, is this idea?
Are there ways for existing residents to benefit from zoning?
If I am in a community and I am opposed to zoning, what if I was able to either directly benefit or have more of a say on what the incremental resources that we collected from More Housing were spent on in my community?
We also know that while zoning can be contentious, a great place to start is also thinking about what assets and resources do state and local governments already own, because those are resources in some ways where there is alignment that more housing is probably better, but oftentimes not quite the information to know what is owned, but then also how could that be repurposed for better and higher uses, particularly around multifamily housing.
We did some of this work for a state where they owned quite a bit of assets in a really dense metropolitan area, several of which were parking lots or office buildings.
Where, yes, you would say that that has some use.
But relative to the need for housing in those places, putting those assets into development for multifamily housing would both have a higher ROI for the state and at the same time solve a real need for residents in that community.
So interesting. You cover a range of solutions in report to help alleviate the housing crisis and we encourage the audience to check out the full research which is available on McKinsey .com.
But for our purposes, why don't you highlight another solution that we can get into here?
The one that really stood out to me was offsite construction.
So this is the idea that you produce components offsite and then assemble them onsite as opposed to doing everything on the site in which housing is built.
Is that prefab JB? Yeah, they're elements of techniques.
The prefab techniques like modular that are included in offsite construction, and what we know is that these are incredibly effective, but also struggle to scale.
So modular in particular, we see that it can be 20 -50 % faster in terms of delivery of units, 20 % cheaper, and more energy efficient.
And at the same time, Offsite construction as a whole represents somewhere between 3 % and 4 % of residential construction in the US today.
And so one of the things we looked at was, we know that this solution works.
Why doesn't it work at scale?
And what we find is one of the underlying factors is state and local building codes.
Essentially the situation today is if I build using modular techniques, I need to comply with state and local building codes that differ across state lines and sometimes even within a state.
And so that lack of uniformity, both increase the complexity of what it takes to deliver.
It results in delays in terms of delivery, and it makes it less of an incentive to develop the scale that is also required to make modular construction achieve some of those cost savings.
Part of what is required for modular construction to really get to that economy is the scale There's enough units, and a big investment to say that this is what needs to happen in a place, and we therefore are able to do so in a way that allows us to reduce the cost and production per unit.
It was part of this work, we actually chatted with some off -site builders, and what we heard is I've cracked this in one state, and I know my technology works, and I have real proof points, and in some cases even investors that would be excited about me doing this in other states, But this seemingly small administrative complexity actually will cause us a ton of challenges and we've heard from the market that doing so is actually not worth the time, and so they have decided, not to scale across state lines.
And so that's a place where innovation is less about new dollars invested and actually about administrative tweaks and changes that could have a huge unlock for the problem we're trying to solve.
You mentioned that there's insufficient capital vested into affordable housing and part of the reason for that is there might be a lower return than their otherwise would be are you seeing any kind of innovative models like public -private partnerships or other financial instruments that are showing more promise to help enable scale and affordable housing?
We are one is this idea of helping financial institutions who need to be compliant with the community reinvestment act or CRA essentially make it easier for them to invest in affordable housing projects.
What we find is that a lot of CRA dollars go to mortgages and small business loans, but a smaller amount actually goes to multifamily affordable housing particularly for rental purposes.
So one small tweak here is how do you actually develop preassembled port CEOs that are CRA compliant multifamily affordable housing investments that make it easier for smaller financial institutions that are less well resourced to do the complex digging of actually trying to find affordable housing deals and offering those in packaged at scale ways for them to invest their CRA dollars.
There are organizations like Community Capital Management that are doing elements of this today that we could envision being further scaled.
So a lot of the solutions that we've talked about feel like public sector solutions, zoning reform for example, is there a role for private sector leaders, business leaders, in addressing housing affordability, what should business leaders be thinking about in this context?
There's a huge role.
What I think it takes to actually develop housing and sustain housing that has affordable over time is not just the public sector, not just philanthropic capital, but a huge element of this is private.
So the first thing I would think about is how and where are they investing their capital, whether that's their endowment, their corporate treasury, or their overall portfolio, allocating more of that underlying resource to housing it as affordable.
Not only provides real returns that are risk adjusted, but also unlocks incredible benefit.
Many of whom will benefit their employees.
The second, and we talked about this as we touched on zoning, is this idea that voices and the platform that one occupies matters, right?
and so often times we see when zoning reform works well, it's both that residents agree that it's a good thing and local business leaders are also advocating for what it could mean for that community.
And so I would also think about leveraging that voice in a way that is championing this issue, both as good neighbors in the place where organizations are housed, but also again for the benefit of their own a place.
GP, what are some of the misperceptions That people have about affordable housing or the obstacles that folks see to building more housing in their neighborhood, identifying their neighborhood?
I think there are a couple of things, the first is this idea that it's not my problem, right?
So it's maybe a problem for other families and other places, but it's not an issue that I really deal with.
And I think the truth of the matter is that one in three American households are housing cost burden.
So whether it's you or your neighbor's here left you're right, this is an everyday challenge that impacts families across our country in every kind of community that you can think of.
I think this second is this idea that affordable housing is just not worth it, right?
So even if, I agree that it's a problem and that there may be some benefit, I don't really see the value longterm, And I think part of what we try to name is, there is a enormous economic and household benefit of self -miss problem.
Again, to the tune of $2 trillion over the next decade and is a fundamental lever to what we think is needed to ensure that American families can achieve their full potential.
JP, what are the potential risks of not addressing this housing shortfall for the socially.
I think the risks are really pronounced.
On one end, I think American families are working incredibly hard, doing everything they can to get ahead, supporting their families with everything they can muster, and still being forced to cough up 30, 50, 70 percent of their paychecks, just to put it roof over their heads.
Our economic and social fabric relies on this relief that you can work hard, do your best, and that effort will be rewarded.
That you can save your family's future, put away money for your kids, own a home.
And this reality has been shifting for a while for decades.
But I think our housing crisis is showing just how challenging that promise is becoming for so many families.
I think the big risk is that by now addressing this issue, yes, we see mutual economic potential.
And we see economic mobility continue to be a challenge for millions of families.
And we also nigg on our promise as a country that working hard is rewarded and that you're able to provide for your family.
And so not to be overblown, but I do think that's a little bit of what's in the balance here in terms of risk.
So we have a crisis that feels like it's only growing more pervasive, more urgent.
potentially worse. We also have a situation where State and local governments are pretty busy taking on a lot, but just don't seem to be expanding rapidly.
What do you think is realistic in terms of what's achievable in the next say three to five years that could really advance us toward mitigating some of the effects of this housing shortfall.
How optimistic are you?
I will say I am a shameless optimist. So on the one hand, I do think that we can solve hard problems. Particularly hard problems that impact every state, every kind of community.
There are things that we can do to fundamentally change the trajectory of our housing shortfall.
And I am bullish on the idea that because it is so crosscutting and ever -present that there's real willingness to do so, the second thing is, I think not all of these changes require capital.
As much as we talk about the need for more capital and affordable housing, much of the changes that we talked about, whether it's public -private partnerships or reimagining zoning There are relatively small, more administrative tweaks that we also think could unlock a ton of benefit and at the same time, not require new investment.
And so, that's a little bit of why I would continue to be bullish.
J .P. Thanks so much for joining us today.
Thanks for having me.
Thanks so much for listening to The McKinsey Podcast. I'm Lucia Riley, and I'm Roberto Facaro.
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