Single family home construction, the largest segment of the nation’s home building industry, is operating at only 40 percent of its normal capacity despite a healthy improvement in starts and production over last year.

Single-family home starts are projected to climb to 534,000 units this year, up 23 percent from 2011. NAHB is forecasting that single-family new-home production will post a healthy 21 percent gain in 2013 to 647,000 units. Starts are expected to continue their upward climb in 2014, posting a further 29 percent rise to 837,000 units, the chief economist of the National Association of Home Builders forecast today.

“Consistent, positive reports on housing starts, permits, prices, new-home sales and builder confidence in recent months provide further confirmation that a gradual but steady housing recovery is underway across much of the nation,” said NAHB’s David Crowe. “However, stubbornly tight lending standards for home buyers and builders, inaccurate appraisals and proposals by policymakers to tamper with the mortgage interest deduction could dampen future housing demand.”

“It’s the single-family market that has the farthest to go, standing at only 40 percent of what is considered a typical market,” Crowe said.

Noting that there is no consistent national trend, Crowe noted the housing recovery is local but spreading. “We are transitioning from a very low demand level, where most people hold themselves out of the marketplace, to a case where supply will start being the problem,” he said. “As we begin to build more homes to address that supply, the new home stock will be a much more important element of the recovery.”

The number of improving housing markets across the nation continues to show considerable advancement. When the NAHB/First American Improving Markets Index (IMI) was launched in September of 2011, only 12 metropolitan areas out of 360 were on the list. As of December 2012, the list stands at more than 200 metro areas. The index is based on a six-month upswing in housing permits, employment and house prices.

Another factor spurring the recovery is that household formations are on the rise. In the early part of the decade, the nation was generating 1.4 million new households each year. This collapsed to 500,000 annually during the housing downturn and currently new households are being formed at close to a 900,000 clip per annum.

As new households form at a growing rate, so too does builder confidence. The NAHB/Wells Fargo Housing Market Index, which measures builder confidence in the single-family housing market, has posted gains for eight consecutive months and now stands at a level of 47. This is very close to the critical midpoint of 50, where equal numbers of builders view the market as good or bad. The HMI has not been above 50 since April of 2006.

Multifamily production is expected to rise 31 percent in 2012, reaching the 233,000 level, and posting a solid 16 percent gain in 2013 to 270,000 units. Multifamily starts are anticipated to rise an additional 9 percent in 2014 to 294,000 units.