Homebuilding strengthened in 2013, but remains below historical averages, concludes The State of the Nation’s Housing report recently released by the Joint Center for Housing Studies of Harvard University. According to this report:

• Though up more than 18 percent from 2012, the 925,000 housing units started in 2013 was still well below the historical average of 1.46 million

• Single family construction was up 15% (618,000), and multifamily construction was up 25% (307,000).

• As single-family construction remained low in 2013, the share of new units built as rentals reached its highest level – just over one-third – since 1974

• New home sales increased 17% in 2013

• Despite last year’s gains, 2014 had a slow start in part due to the harsh winter; in the first quarter, housing starts and new home sales were down by 3 percent while existing home sales were off by 7 percent

This homebuilder data is part of a broader finding, detailed in the report, that while the US housing recovery continues, it also faces a number of significant challenges. In particular, tight credit, still elevated unemployment, and mounting student loan debt among young Americans are moderating growth and keeping millennials and other first-time homebuyers out of the market.

The housing market has been significantly affected by rising interest rates and tighter credit, which impact the volume of both purchases in refinances. Mortgage rates on 30-year fixed loans rose from 3.6 percent to 4.4 percent during 2013, before falling back in early 2014, while mortgage applications for home purchases declined 10 percent from the first to the second half of 2013.

The report also finds that the housing recovery is constrained by steady but unspectacular job growth. Total employment has just returned to its previous peak, but remains well short of the gains necessary to accommodate the several million additional working-age adults that have joined the labor force since the start of the recession. At the same time, real incomes have fallen. Between 2007 and 2012, real median household incomes dropped 8 percent among 25–34 year olds and 7 percent among 35–44 year olds; a key finding because homeownership rates for both of these age groups have historically closely tracked changes in incomes. By the end of 2012, overall real median household incomes were at their lowest levels in nearly two decades, while real median incomes for households aged 25-34 were lower than those of households of the same age in 1972. However, the report finds that growth may be beginning to resume, with 2012 incomes edging up 1.2 percent among workers aged 35–44 and dipping just 0.3 percent among those aged 25–34.

In addition to high unemployment and falling incomes, young Americans are also increasingly burdened by student loan debt. Between 2001 and 2010, the share of households aged 25–34 with student loan debt grew from 26 percent to 39 percent, with the median amount rising from $10,000 to $15,000 in real terms. Within this group, the share with at least $50,000 in student debt more than tripled from five percent to 16 percent. Together, these factors have caused lower rates of household formation, and will likely delay homeownership for this group.

Nevertheless, given the current size of the adult population as well as current headship rates by age or race/ethnicity, the Joint Center for Housing Studies estimates that demographic trends alone will push household growth in 2015–25 somewhere between 11.6 million and 13.2 million, depending on foreign immigration. This pace of growth, the report finds, is in line with annual averages in the 1980s, 1990s, and 2000s, and should therefore support similar levels of housing construction as in those decades.