Here is what builders need to know for the coming months: Keep building smaller, more affordable homes, even as the economy recovers, because that’s what people will be most likely to buy.

Hammered by “heavy employment losses,” not to mention pay cuts and furloughs, “estimates of consumer incomes are running much lower” than previously projected, according to Nigel Gault, chief U.S. economist for IHS Global Insight in Lexington, Mass.

“The new revised figures have taken some $200 billion out of labor compensation estimates—that’s almost 4 percent off consumer income,” Gault explained last week during a Web presentation on the likely recovery for the U.S. economy. “It leaves consumers in worse shape than thought in terms of spending.”

For that reason, smart builders will want to concentrate on lower-priced homes that these economically-battered buyers can actually afford. “Wages and incomes are extremely constrained,” Gault said about employment situation. Unemployment, for example, is expected to reach a peak of 10% next year. That’s because employment growth—i.e., companies adding or replacing jobs—tends to lag behind other economic indicators as wary firms remain hesitant about hiring people.

Building less pricey homes also should offer some protection against additional home value drops. “We are not convinced yet that home prices have completely bottomed out,” Gault said. “… We suspect there’s probably a little further [for home prices] to go on the downside because foreclosure rates are still very heavy.”

The presentation also contained some good news for builders. Single-family housing seems to be on the upswing after hitting the bottom earlier this year, and the picture for mortgage lending is also brightening.  “Mortgage credit has turned,” said Brian Bethune, chief U.S. financial economist for IHS Global Insight. “Mortgage credit declined in the first quarter of 2009, but there are clear signs of improvement in the second quarter.”

Alison Rice is senior editor, online, at BUILDER magazine.