The children of baby boomers will eventually resuscitate the pummeled U.S. housing market, Harvard University said on Monday, but in the meantime, limits on income and credit are sustaining the three-year bust.

The highest unemployment in almost 26 years, record foreclosures and rigid lending threaten to overcome emerging home sales progress despite unprecedented efforts by the Obama administration, Harvard's State of the Nation's Housing 2009 report said.

Echo boomers, the children of the post-World War Two baby boomer generation, offer a massive source of support for housing, the study said. The generation is entering the peak home buying and renting ages of 25 to 44 and numbers over five million people more than did their parents' record-sized group in the 1970s.

Echo boomers are larger than the baby boomer population. Couple that with immigration and you have the seeds, the possibility of a housing recovery, Nicolas Retsinas, director of Harvard's Joint Center for Housing Studies, said in an interview.

The group will bolster demand for the next 10 years and beyond, supporting the sagging housing market even if immigration drops, the study said.

The challenges are myriad, however, said Retsinas, a widely followed housing industry expert and former senior official in the Department of Housing and Urban Development.

We have to find a way to stabilize housing finance in this country, he said.

A healthy housing market is integral to a growing economy. In the current cycle, the housing crash has propelled the economy into its longest recession since the Great Depression. Jobs lost to the recession have derailed any housing recovery.

Seedlings of the housing recovery have to come through this thicket of job losses and foreclosures, Retsinas said. The housing market has not seen these challenges for over 60 years.

Mortgage rates have risen from all-time lows in the past two months despite massive government steps to keep them down.

Foreclosures escalate as federal efforts to keep borrowers in their houses cannot keep pace with loan failures caused by job losses or punishing home price erosion.

THIN SILVER LININGS

Home sales have started to pick up, thanks mostly to a first-time buyer tax credit this year of up to $8,000 and demand for foreclosure properties at bargain-basement prices.

While we do see some signs of stabilization, you can barely see those silver linings, Retsinas said.

The lending pendulum swung vastly after the unsustainable five-year record home price surge early this decade. Lenders clamped down after lax conditions spawned record home sales and then fueled the torrent of foreclosures.

Now, more than 85 percent of mortgage loans are created through the government and its agencies. Private lending companies either shut down or slammed on the credit brakes to prevent a repeat of major losses on flawed loans.

What happens to mortgage availability currently rests in the hands of the federal government, the report said.

But Retsinas noted: Eventually you want a sustainable credit system, and that has to include private capital.

The share of minority households, hurt most in the housing crisis, will rise to 35 percent in 2020 from 29 percent in 2005, the study projected. Those households typically have lower average incomes and wealth, and higher unemployment.

In Cleveland, Boston and Washington, DC, price declines at the low end of the market through December were more than twice those at the high end in percentage terms, while in San Francisco they were nearly three times greater.

Real median household incomes in all age groups under 55 have not risen since 2000, the Harvard study said. For the first time in at least 40 years, there is a chance that median household income will end the decade lower than where it started.

The severity of the recession could hold incomes down for years.

The number of households that were severely cost-burdened -- people paying over 50 percent of their income for housing -- has grown dramatically, Retsinas said. The number spiked by 30 percent to 17.9 million between 2001 and 2007, the most recent data available.

The reality is that it's not just the cost of a house, but it's how much you make, he said. Of course as people struggle with their jobs, as they lose that second job, they lose that overtime, their income drops make it more difficult to pay.

Echo boomers will expand the number of needed housing units. But they also likely will enter the housing market with lower real incomes than people the same age did a decade ago, the study said.

While fundamentally we see what could be the foundation for long-term recovery, we still have to get through today's challenges, said Retsinas.

(Editing by Dan Grebler)

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