Steady employment and economic growth, pent-up demand, affordable home prices and attractive mortgage rates are expected to keep the housing market on a gradual upward trend in 2016. However, persistent headwinds related to shortages and the availability of lots and labor, along with rising materials prices, are impeding a more robust recovery, according to economists who participated in a recent National Association of Home Builders (NAHB) Fall Construction Forecast Webinar.

“This recovery is all about jobs,” said David Crowe, NAHB chief economist. “If people can get good jobs that pay decent incomes, the housing market will continue to move forward.” The good news, Crowe added, is that total U.S. employment of 142 million is now well above the previous peak of 138 million that occurred in 2008. The one caveat is that job growth has been concentrated heavily in the service sector, which tends to pay lower wages than goods producing jobs.

Meanwhile, home equity has nearly doubled since 2011 and now stands at $12.5 trillion. “The single biggest asset in most people's portfolio is the home they own,” said Crowe. “That’s important because the primary purchasers of new homes are the sellers of existing homes. The more equity they have, the more comfortable they feel about purchasing a new home.”

While mortgage interest rates are expected to rise over the near-term, averaging 4.5% in 2016 and 5.5% in 2017, Crowe said this is not expected to have an impact on the housing recovery. Crowe noted several factors that are hindering a more robust recovery. Citing an NAHB survey of its members, 13% of builders reported the cost and availability of labor was a significant problem in 2011; that concern jumped to 61% in 2014. About one-fifth of builders shared the same concerns regarding lots in 2011, and that ratio shot up to 58% in 2014. Concerns over building materials stood at 58% among builders in 2014, up from 33% in 2011.

NAHB is projecting 719,000 single-family starts in 2015, up 11% from the 647,000 units produced last year. Single-family production is projected to increase an additional 27% in 2016 to 914,000 units. On the multi-family side, production ran at 354,000 units last year, slightly above the 331,000 level that is considered a normal level of production. Multi-family starts are expected to rise 9% to 387,000 units this year and post a modest 3% decline to 378,000 units in 2016. Residential remodeling activity is forecasted to increase 6.8% in 2015 over last year and rise an additional 6.1% in 2016.

Looking at home buyer preferences, Ralph McLaughlin, Trulia housing economist, said that contrary to popular belief, millennials prefer to own a home in the suburbs rather than rent in the cities. “Many believe that home buyers are bucking the trend of previous generations in that they want to live in urban areas and want to rent,” he said. “What we are finding from our surveys is just the opposite. Among millennial renters, almost 90% say they eventually want to purchase a home. That is significantly higher than Gen Xers, who were hurt by the recession, and quite a bit more than current baby boomer renters, who are at 40%.”

However, an overwhelming majority of millennials, who are still starting households and paying off college debt, say it will be at least two years before they are ready to buy. Roughly half of all Americans prefer to live in suburban areas, about a quarter prefer urban areas and just over 20% prefer rural communities, according to a Trulia survey conducted last November. The percentage of households living in urban neighborhoods in 2013 was lower among nearly all age groups compared to 2000.

“As we get into the recovery, suburban areas are growing faster than urban areas,” said McLaughlin. “That is a sign that the urbanization trend we saw start to happen at the beginning of the recovery was more of a blip rather than a new rule.”

Housing market conditions are improving in all regions, but the pace of recovery continues to vary by state and region. “We've gotten to the point in the recovery where we no longer have problems that came with the housing bust,” said Robert Denk, NAHB senior economist. “It now is really a matter of housing markets reconnecting to the fundamental drivers, and that is employment. Production has been rebounding in all regions, prices have been moving up and new foreclosures are back to more normal levels.”

Using the 2000-2003 period as a healthy benchmark when single-family starts averaged 1.3 million units on an annual basis, NAHB is projecting that single-family production, which bottomed out at an average 27% of normal production in early 2009, will rise to 74% of normal by the fourth quarter of 2016 and climb to 91% of normal by the end of 2017. Single-family production currently stands at 53% of normal activity.

The hardest hit areas during the downturn were a combination of the bubble states (California, Arizona, Nevada and Florida) and the industrial Midwest. The bubble states had the most excessive price and production spikes, while the problems in the Midwest were more related to fundamental economic weakness. The most successful recoveries are happening now in the energy states, including North Dakota, Wyoming, Texas, Montana and Louisiana. Other states exhibiting strong employment and housing growth include South Carolina, Utah, Tennessee, Idaho, Oregon and North Carolina.

In another way of looking at the long road back to normal, by the end of 2017, the top 40% of states will be back to 99% or more of normal production levels, compared to the bottom 20%, which will still be below 73%.

For more information, visit www.nahb.org or www.trulia.com.