The U.S. housing recovery should regain its footing, but also faces a number of challenges.  Tight credit, still elevated unemployment, and mounting student loan debt among young Americans are responsible for moderating growth and keeping millennials and other first-time homebuyers out of the market according to the latest edition of The State of the Nation's Housing released today by the Harvard Joint Center for Housing Studies.

 "The housing recovery is following the path of the broader economy," says Chris Herbert, the Center's research director. "As long as the economy remains on the path of slow, but steady improvement, housing should follow suit."

The report takes an in depth look at the housing markets and their demographic drivers, homeownership, rental housing, and finally the challenges facing housing.    We will briefly summarize the report's findings here then report on each of the above categories in greater detail over the next few days. 

The report notes that even though housing started out 2013 with a bang the market slowed noticeably in the second half of the year as home starts and sales of both new and existing homes slowed.  Higher interest rates following the Federal Reserve announcement that it was considering tapering its purchases of long-term and mortgage-backed securities was partially to blame as were the retreat of investors from the market, limited inventories of homes for sale and affordability issues following rapid home price increases.  But the report says the slow recovery of single-family housing largely reflects the steady but unspectacular return of jobs.

Household growth has remained subdued both as a result of a slowdown in immigration and lower headship rates among the millennial generation, many of whom continue to live in their parents homes.  It was hoped that many of the latter group would move out and form their own households once the labor marked revived but it has not yet happened.  Still it is likely that the current generation will follow historic patterns and form households by their early 30s, providing a strong lift to the rental and starter home markets.

Homeownership rates declined for the ninth straight year in 2013 and are at their s lowest levels since 1995, but the decrease last year was the smallest since before the housing crash.  The Joint Center sees many of the conditions holding homeownership down as improving; steady employment growth, rising home values creating a sense of urgency, and a lower share of distressed homeowners.

Still the homebuying market faces headwinds; higher home prices and interest rates making a purchase more of a stretch for many families as is falling income.  In addition, many would-be homebuyers are burdened with huge levels of student debt.  Adding to these financial pressures, qualifying for mortgage loans is still a challenge-especially for those with lower credit scores.

Rental markets continue to be strong.   The number of renter households rose last year, and while the rate of the growth is slowing it still remains above long-term averages.  With this demand vacancy rates continued to fall and rents to rise  Nationwide rents rose 3 percent in 2012 but in some markets, generally the ones that have also seen rapid rises in home prices like Denver and the San Francisco Bay area, the increase has averaged twice that.

The ramp-up in multifamily construction also continued in 2013; starts increased 25 percent, surpassing the 300,000 mark the first time since 2007.  The number of these units intended as rentals was at the highest level since 1998.  While multifamily construction in almost half of the 100 largest metros is back to average 2000s levels and has set new peaks in some markets those areas that experienced the sharpest booms and busts remain depressed.

From 2010 through early 2012 apartments in investment grade properties seemed to be renting faster than new units were added, bringing down vacancies and lifting rests. Supply and demand appear to have returned to balance in the last quarter of 2013. 

The report says however there is a crisis of affordability.  The share of cost-burdened renters (those paying housing costs in excess of 30 percent of their income) rose every year but one between 2001 and 2011 and now is over 50 percent.  More than a quarter of households are severely cost burdened with half or more of their income spent on shelter. On the homeowner side the situation has improved as owners have refinanced at lower rates and many have existed homeownership because of foreclosures. However the share of cost-burdened homeowners it still higher than at the beginning of the last decade.  

Looking ahead, the Center says the future course of homeownership will depend largely on the cost and availability of mortgage financing.  Looser underwriting standards may help bolster the housing market recovery and the government appears to be taking steps to buoy the market with newly announced programs to lower FHA premiums, provide homebuyer counseling, and encourage lending to properly documented lower credit score buyers

The Center, however, views the prospects for improving rental housing affordability as bleak.  Absent income growth or an easing of rents, rental assistance is the only option. Without expanded federal funding to aid the neediest households, millions  of  US  families  and  individuals will continue to live in housing that they cannot afford or that is inadequate, or both.