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Housing has peaked. Here are the reasons the market has cooled.

There are three segments of affordability: Income, housing price, and mortgage costs. All have made it more difficult to buy a home.

Housing sales have cooled as Millennials have opted to postpone buying.
Housing sales have cooled as Millennials have opted to postpone buying.Read moreAP

The housing market is one of the key sectors in the economy. When housing booms, many segments of the economy are pulled along. But this sector is now slowing.

Are we in for a new housing market meltdown? Probably not, but that doesn't mean the future of the housing market is bright. Factors are in place that imply housing has entered a new phase that will not be as strong as in previous cycles.

Housing has peaked. Since spring, housing starts and new and existing home sales have trended downward. Home prices, which had been surging, are now rising more slowly and in some cases are declining from 2017 levels.

A variety of factors have created the deceleration, the biggest being the decline in affordability.

There are three segments of affordability: income, housing price, and mortgage costs. All have been moving in ways that have made it more difficult to buy a house.

In many parts of the country, prices have risen sharply. With mortgage rates increasing, the monthly cost of a mortgage has surged. Unfortunately, income growth has not grown fast enough to offset the higher costs.

When you combine higher monthly payments with limited income, you get a market that had to weaken.

But it isn't just affordability that is weighing on the housing sector. Demographics are playing a major role, as well.

When considering housing demand, cost is just one factor. The potential size of the market has to be taken into account. With housing, it's how many people/families might be interested in buying a home.

The key, then, to housing sales is attracting younger buyers — millennials — into the market.

And there's the rub. When it comes to home ownership, millennials are behaving markedly differently than previous generations.

According to a study by the Urban Institute, in 2015 only about 37 percent of those in the age group 25 to 34 own homes. In comparison, 45.4 percent of GenXers, when they were that age, lived in their own unit, while Baby Boomers had an ownership rate of 45 percent.

The gap in ownership rates has been created by both preferences and financial factors.

The so-called American dream of homeownership is not as much a priority for millennials. While their parents aspired to buy their own home, millennials have an attitude of "been there, lived that." They have other dreams and they prefer to spend their money on other things, especially technology.

They are also forming households later. The marriage rate for younger individuals has dropped precipitously — from 52 percent in 1990 to 37 percent in 2015, according to the same Urban Institute study. That leads to more groups living together in rental properties and a lowered need for individual housing.

Millennials are also under financial pressure. Disposable income growth has been minimal during their working years and that has led to low, if any, savings.

Down payments are a major hurdle. As long as incomes grow slowly and preferences for non-shelter-related products remains high, the savings rate will stay depressed.

Finally, millennials are saddled by school loans. While other debt can be discharged through bankruptcy, it is extremely difficult to do so using the standard bankruptcy rules. And defaulting or underpaying can lead to even greater debt burdens. Millennials can wind up in a student-loan repayment trap that could lock them out of home ownership for an extended period.

While millennials should eventually move more extensively into home ownership, it could be a while before they do so. For the next few years, the potential demand for homes will be lower than would be expected, given the demographics.

There is good news and bad news in the reduced millennial involvement in the housing market.

Consider the current situation. While the housing market is cooling, sales and starts never soared. Thus, the good news is that the economy is not facing a housing bubble. Yes, there may be metro areas where prices climbed too high, but with sales and construction at moderate levels, the economic impact of a slowdown should not be great.

On the other hand, as long as millennials show disdain for home ownership, builders will be operating in a lessened demand environment. They will need to adjust to that lowered sales pace.

Housing is fading, but the sector doesn't pose the same threat to growth that previous downturns have had on the economy. However, don't expect housing to lead the way going forward, as it may be years before millennials become fully engaged in the market.