Thanks to rising incomes and a strong demand for rental units, the U.S. housing market continues to bounce back from the Great Recession, according to The State of the Nation’s Housing report, released Wednesday by Harvard’s Joint Center for Housing Studies. In fact, it could help the nation’s financial health improve as low energy prices, a strong dollar and a weak global economy threaten the seven-year recovery.

The downside is that homeownership is out of reach for many people, including the huge millennial population that’s expected to form millions of new households over the next decade. Additionally, housing costs are becoming an unsustainable burden for the poorest Americans.

“We’re making steady progress,” said Chris Herbert, the managing director of the Harvard Joint Center for Housing Studies, during Wednesday’s panel discussion about the report. “We’re not expecting it to take off like a hockey stick, but last year we solidified a lot of gains. The numbers we watch are twofold. One, household formation. Much of it has been slowed because young people are not moving out of their parents’ basements. But as millennials turn 30, they do go out on their own. The other factor is income.”

Building the Recovery

Housing construction should average at least 1.6 million units a year over the next decade, according to the report. That will give the economy a much-needed boost.

Residential fixed investment (RFI), including new construction and homeowner improvements, generated $600 billion in 2015 or 3.3 percent of gross domestic product (GDP). That’s below the historical average of 4.6 percent, but it’s an increase from the all-time low of 2.4 percent of GDP in 2011.

The rental market continues to drive the housing recovery, with 36.4 percent of U.S. households opting to rent in 2015— the largest share since the late 1960s. One factor behind that is the boom in multifamily construction. While single-family housing starts rose to 715,000 in 2015, a 10.5 percent increase over 2015, multifamily starts hit a 27-year high of 397,300, up 11.8 percent – and the number of multifamily starts intended for rent rose to 370,000 units in 2015, the highest level since the 1980s.

High Costs, Tight Lending

But more people are renting because buying is just too expensive – and it’s harder to get a loan, too.

“The National Association of Realtors just today reported that the median home price in the U.S. is now at $239,700,” said CNBC reporter Diana Olick, who moderated Wednesday’s panel about the Harvard housing report. “That’s the highest number ever. While we are in a housing recovery, we’re coming up against affordability issues.”

In 2015, the national homeownership rate slipped to 63.7 percent, the continuation of a 10-year downward trend. The largest drop has been in households between the ages of 35 and 44, with rates dropping nearly 11 percentage points, from 69.2 percent in 2004 to 58.5 percent in 2015. Many factors are to blame in addition to high costs, Herbert said.

“Tight mortgage credit, the decade-long falloff in incomes that is only now ending, and a limited supply of homes for sale are all keeping households—especially first-time buyers—on the sidelines,” he said. “And even though a rebound in home prices has helped to reduce the number of underwater owners, the large backlog of foreclosures is still a serious drag on homeownership.”

That makes renting more attractive – but it, too, is getting more costly.

According to the report, rental vacancy rates have fallen since 2010, dropping to 7.1 percent by the end of 2015. Because of that, rents have risen. The median rent on a new apartment was $1,381 per month in 2015, well out of reach for the typical renter earning $35,000 a year. High rents reflect factors such as a limited supply of land zoned for multifamily use and a complex approval process that adds to development costs, the report said.

“Regulations have a purpose, but we really need to look at them closer,” Herbert said. “Each time we go through a building cycle, we ratchet up the regulatory regimes that increase costs.”

High earners choosing to rent instead of own are also driving up prices, because more developers are taking on projects that cater to them. According to the report, households earning $100,000 or more have been the fastest-growing rental segment over the past three years.

The Poor Hit Hard

Homeownership rates might rebound, but it’s unclear when or how, especially as income inequality increases. According to the report, households earning less than $25,000 account for about 45 percent of the net growth in U.S. households from 2005–2015. The number of cost-burdened renters – defined as those whose housing expenditures exceed 30 percent of their income — hit 21.3 million in 2014. Even worse, 11.4 million of these households paid more than half their incomes for housing, a record high.

“The question is not so much whether families will want to buy homes in the future, but whether they will be able to do so,” Herbert said.

One panelist suggested more government funding could help.

“What we need to make it feasible is a significant investment from the federal government, said Diane Yentel, president and CEO of the National Low Income Housing Coalition. “The problem isn’t that we don’t have solutions. It’s that we’re not funding solutions at the level to meet the need. We’re spending $200 billion to help Americans buy and rent homes, but most goes to subsidize upper-income people with things such as the mortgate interest deduction.”

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