Communities across the United States are facing a housing crisis. For many Americans facing high costs, long commutes, overcrowding, or homelessness, an affordable stable home is increasingly out of reach.
According to a new report from the McKinsey Institute for Black Economic Mobility, the United States faced a shortage of more than eight million housing units in 2023. The report, Investing in housing: Unlocking economic mobility for Black families and all Americans, reveals that Black Americans are disproportionately affected, with 60 percent of Black renters and 30 percent of Black homeowners severely cost burdened, well above national averages.
“Our report is a comprehensive look at the extent of this issue—including what we could collectively gain from addressing it head-on—and how we might go about it,” says JP Julien, McKinsey partner and a leader of the Institute for Black Economic Mobility.
Solving this complex problem requires bringing together a broad set of stakeholders. McKinsey associate partner and report coauthor Kelsey Muller explains some key points of the five innovative solutions—out of 80 different ideas—outlined in the report, and how they interact with each other.
Solution 1: Unlock land through creative incentives
We need more space to build housing, yet 17 percent of urban land in the United States remains vacant. This is often due to zoning restrictions, which limit new construction and housing density. Zoning reforms work but have generally been too limited and too unpopular to address the need.
How can we incentivize zoning reform? Some state and local governments have tried providing financial incentives for communities to fund high-density development. However, when the benefits are indirect, it can backfire. For example, a town in Massachusetts chose to lose funding for public projects, including over $140,000 in state funding for a seawall, rather than comply with mandatory state zoning changes to create affordable housing developments.
A novel approach to overcoming opposition to zoning reform is to put the money into residents’ pockets through direct financial benefits. This is how residents in Alaska approved a pipeline—a share of profits went directly to them. Paying dividends from tax revenues associated with development straight to residents—as opposed to the town’s coffers, which would indirectly benefit them through public projects—could persuade people to support more housing and density in their neighborhoods.
Real change requires collaboration among all stakeholders, as no single solution can solve the crisis alone.
Solution 2: Augment programs to unleash private capital
Developing affordable housing often requires subsidies and creative approaches to financing. However, traditional financing institutions aren’t always set up for that and organizations that cater to affordable development struggle to meet demand. This creates a chronic financing shortage for affordable housing developers. For example, more than half of community development finance institutions (CDFIs), financial organizations that serve low-income communities and nonprofits through lending and credit, report high demand that they can’t meet.
One major issue CDFIs face is a limited secondary loan market, which prevents CDFIs from replenishing capital. A healthy secondary loan market allows CDFIs to sell current loans to investors. Once CDFIs sell the loans, they then have fresh capital to reinvest in the next set of affordable housing developments.
Banks are already incentivized to meet their community's financial needs through the Community Reinvestment Act (CRA), a federal law. One potential solution is to bundle CDFI loans into portfolios that meet CRA requirements, making them more attractive to banks and strengthening the secondary loan market. The nonprofit Scale Link is already doing this, purchasing around 3,500 loans from CDFIs, selling nearly $37 million to bank partners and providing $55 million in capital.
Solution 3: Scale off-site home construction
Rising material costs and a national labor shortage have significantly increased housing prices. As a result, it is critical to find ways to build with greater speed and efficiency. Off-site home construction, where components of homes are built off-site and then assembled at their final destination, is often cheaper than building on-site—yet off-site construction has struggled to scale. One reason is the complex permitting process, which varies widely in every state and city. Every hour lost in permitting and development drives up costs for builders, ultimately increasing housing prices for consumers.
Widely differing permitting codes make it much harder for off-site construction companies to do their jobs. They have to invest in learning about the various codes, change their processes, and respond to any problems that might not be in line with local regulations. Standardizing state and local codes could remove many roadblocks and cut down timelines.
Solution 4: Reinvest in public housing and shared-equity models
The public housing system has a $115 billion backlog in funding needed to address basic safety and quality concerns. How do we bring more units online and make them habitable? One way is through conversion from Section 9 housing, which is primarily federally funded public housing, to Section 8 voucher-based housing, which provides tenants with rental assistance to pay for private housing. The conversion allows for private investment from commercial landlords and other private and government sources.
However, public housing authorities (PHAs) often lack the technical capacity to facilitate conversions, especially when rehabilitation costs are high. Better access to technical assistance and sophisticated financial tools could help them take on and manage more conversions.
Nonprofits also have a role to play in bringing public housing units back online through shared-equity housing solutions. One common model is a community land trust (CLT), where often a nonprofit purchases land, develops new housing, or acquires property and places it in a trust run by community members who then manage holdings to ensure long-term affordability. Expanding shared-equity models like CLTs could create lasting affordability and build wealth for residents.
Solution 5: Revamp housing choice vouchers
Section 8 housing vouchers are the largest source of rental assistance in the country. Despite their availability, only one in four eligible families use housing vouchers, and just 60 percent of them secure housing with the assistance.
In this model, renters generally pay 30 percent of income toward rent, while vouchers subsidize the landlord for the remainder. Landlords, however, frequently deal with high administrative burdens in the form of rent negotiations, delayed payments, and inspection processes—and some outright discriminate against voucher holders.
Giving the rental assistance directly to families may help circumvent this process and enable more people to benefit from subsidized housing. Additionally, looking at other ways to reduce administrative burdens and sticking points on landlords should be explored. For example, up-front security payments, automatic direct deposits, and other ways to streamline the rental processes may incentivize more landlords to participate in the Section 8 voucher program.
Real change requires collaboration among all stakeholders, as no single solution can solve the crisis alone. It’s a constant exchange between public, private, and philanthropic partners to make this happen—that’s the big lesson from all these innovations.