Home prices are about 30% below what they were at the market’s peak in mid-2006. So why is housing still taking a bigger bite out of people’s incomes?

Affordability, especially for low-income households, remains one of the central challenges to achieving a fuller and sustainable housing recovery, according to the Joint Center for Housing Studies at Harvard University, which on Thursday released its State of the Nation’s Housing 2012 annual report on the industry’s health and future.

This 25th edition of the report offers the Joint Center’s usual exhaustive examination of factors that impacted the housing market over the past several years, as well as projections about where the market is headed and why.

Given that this has been one of the worst housing recessions in the country’s history, the Joint Center strained to find a silver lining. “The housing market outlook [is] significantly brighter than a year ago,” the report states. But “as 2012 began, the ingredients needed to spark more normal household growth were still not it place.”

The Joint Center projects annual household growth through 2020 to average 1.8 million, with 70% of that growth being minorities. A good portion of those household formations will populate a burgeoning rental market that in the 2000s added 5.1 million renters, the largest decade-long increase in the post–World War II era. However, widespread rent increases have so far limited the ability of younger Americans to live independently, especially those who are weighed down with college debt.

The Joint Center points to various studies that show the under-30 Echo Boomers still want to own houses. And given that this demographic group could be as much as 7 million larger than the Baby Boomer cohort, getting them out of their parents' houses and renting and owning is critical to housing’s long-term prosperity.

Construction and sales of new and existing homes are also at a positive “turning point,” the report states. But even here, the Joint Center hedges its assessment by noting that while inventories of new homes, as of March 2012, were at their lowest levels in five decades, vacant units being held off of the market continue to expand. And as these units come back onto the market, they will pressure home prices that remain middling.

The Joint Center is buoyed by employment gains over the past two years, although job creation needs to be a lot stronger going forward for sustainable housing growth. Other headwinds to housing’s recovery include “persistent” weakness in home prices that has kept more than 11 million households underwater on their mortgages. The Joint Center also frets about the backlog of foreclosures, and the length of time it’s taking to complete the foreclosure process (more than 800 days in some states), as being drags on housing’s recovery.

“The sheer depth of the downturn and scale of mortgage debt overhang mean that it will be some time before a robust housing market recovery is at hand,” the report states.

Housing Cuts Deeper into Incomes

“Housing is centrally important to the functioning of our national economy,” says George McCarthy, who runs the Metropolitan Opportunity Program of the Ford Foundation in New York, where the Joint Center presented its report’s findings. But McCarthy thinks housing’s prospects could be “terrifying” if issues pertaining to affordability aren’t addressed.

Even with home-price deflation, affordable housing is still a mirage for many Americans. The number of households that spend more than half of their monthly incomes on housing rose by 2.3 million between 2007 and 2010, to 20.2 million. The vast majority of that increase was renters, 27% of whom are “severely burdened” by housing costs, twice the percentage of homeowners.

Affordability is a major issue because low-income households are accounting for a growing percentage of new household formations. But only 25% of low-income families currently are benefiting from federal rental assistance programs. And over this past decade 470,000 affordable rental units have vanished.

The Joint Center fears that, in their zeal to reduce the size of government and federal deficit, lawmakers will more aggressively cut or eliminate programs and tax expenditures that aid renters and homeowners, not only the mortgage interest deduction and mortgage bond revenue program, but also programs that benefit those on the lower rungs of society.

The uncertainty surrounding the role that the federal government will play in providing or backstopping mortgage financing is also cause for concern about housing’s future, especially in how it affects financing availability to minorities who are expected to drive household formation for the next decade. (Last year, 27% of Hispanics and 38% of African Americans who applied for mortgages were denied.)

The Joint Center's report urges the nation not to turn its back on “expanding the supply of safe, decent housing that is affordable to the growing numbers of low-income Americans.” The report goes on to say that “now is not the time to cut back on housing programs that have had demonstrated success in providing a springboard to opportunity for many of the nation’s most vulnerable households.”

View the Joint Center's full State of the Nation's Housing 2012 report.

John Caulfield is senior editor for Builder magazine.

Learn more about markets featured in this article: New York, NY.