Vista Pacifica Realty

High-end homes remain hard to sell. This Santa Monica, Calif., house is on the market at about $1.36 million.

Spring may come early this year in the U.S. housing market.

Four years into the Great Slump, Realtors and home builders finally have an effective sales pitch: Many buyers can qualify for tax credits of as much as $8,000 if they agree on a home purchase by April 30. Meanwhile, economists say mortgage rates, currently around 5% for standard 30-year fixed-rate loans, are likely to be at least modestly higher later this year as the Federal Reserve withdraws support for the market. And sharply lower prices, down more than 50% from peak levels in some areas, have lured investors into fevered buying of low-end and middle-class homes, leaving supplies tight in many areas. (See data on 28 metros.)

“If the houses are priced right, we’re seeing multiple offers,” says Jim Sexton, an associate broker at Russ Lyon Sotheby’s International Realty in Scottsdale, Ariz., an upscale suburb of Phoenix. “Most of them are priced at about half of what they were a couple years ago,” he says.

Builders are racing to put up “spec” homes, ones that don’t yet have a buyer. They want to be ready with products for people who decide to grab that tax credit at the last minute. Meritage Homes Corp. promises to build “your home, your way” in 99 days in some communities in the South and West.

“Don’t delay!” shouts a flyer that KB Home, a national home builder, is handing to prospective purchasers.

Peter Barnum, a manager of data-processing systems who rents a home in White Plains, N.Y., has the right attitude in the face of this onslaught. He plans to look at condominiums this spring but feels no urgency to pounce. “I think the real estate market is not going to go gangbusters this year,” Mr. Barnum says. “Some people say it’s going to get worse before it gets better.”

Case - Shiller Peak-to-Current Price Drops

Date	Trough date	Peak to trough declines
TX-Dallas	2/1/2009	-11.22%
NC-Charlotte	11/1/2009	-12.67%
CO-Denver	2/1/2009	-14.30%
MA-Boston	3/1/2009	-20.07%
NY-New York	4/1/2009	-20.92%
OR-Portland	4/1/2009	-21.26%
OH-Cleveland	3/1/2009	-21.56%
WA-Seattle	11/1/2009	-22.75%
GA-Atlanta	3/1/2009	-23.01%
IL-Chicago	4/1/2009	-27.46%
Composite-20	4/1/2009	-32.57%
Composite-10	4/1/2009	-33.52%
DC-Washington	3/1/2009	-33.91%
MN-Minneapolis	4/1/2009	-36.52%
FL-Tampa	11/1/2009	-41.34%
CA-Los Angeles	5/1/2009	-41.89%
CA-San Diego	4/1/2009	-42.31%
MI-Detroit	6/1/2009	-45.30%
CA-San Francisco	3/1/2009	-46.08%
FL-Miami	5/1/2009	-48.52%
AZ-Phoenix	5/1/2009	-54.46%
NV-Las Vegas	11/1/2009	-55.61%

That’s possible. More than seven million households are behind on mortgage payments or in foreclosure, and lenders eventually will put many of those homes on the market. Unless the job market improves, it will be hard to find buyers for all those foreclosed homes, and prices could take another downward lurch.

The outlook for employment and foreclosures are two “huge unknowns” clouding the housing picture, says Tom Lawler, an independent economist based in Leesburg, Va. He doesn’t discourage people who can afford a house from buying now. “In a lot of areas, it’s not a bad time to buy,” given the drop in prices, he says. He believes mortgage rates could rise to around 5.75% by year end. But he says buyers should aim to lock in today’s mortgage rates and the tax credit only if they are sure they can afford a home.

There remains a hard-to-measure “shadow” inventory of homes that will hit the market once more foreclosures are finalized. Lenders haven’t even started the foreclosure process, which often takes more than a year, for about 2.5 million households that are more than 90 days behind on their payments, according to data from LPS Applied Analytics. It isn’t clear how many of those borrowers can be saved through loan modifications that cut payments; many analysts assume that most of the borrowers eventually will lose their homes.

So rather than just looking at the current supplies, potential buyers need to consider the potential foreclosure supply as well as the state of the local job market. Metro areas with the highest rate of defaulting borrowers include Miami-Fort Lauderdale, Las Vegas, Phoenix, Orlando and Tampa. (See this table for details.) Among the 28 major areas we surveyed in our quarterly housing outlook, Moody’s Economy.com sees the weakest job-market prospects this year in Las Vegas, Tampa, Jacksonville, Atlanta, Detroit and Phoenix. (See details on homes in six specific markets here.)

By contrast, some metro areas are benefiting from relatively low default rates and job markets outperforming the dismal national average. They include Minneapolis, Raleigh, N.C., Dallas, Houston and Washington, D.C.

In most of the nation, “we’ll probably be seeing a fairly strong spring selling season,” says Jody Kahn, a vice president at John Burns Real Estate Consulting. She says her recent surveys of home builders show that shoppers have been out in greater numbers in recent weeks and seem more serious about buying. “Consumers are starting to feel a little more comfortable” that the worst of the job losses are past, Ms. Kahn says. “There does seem to be a sense that now is a good time to buy.”

A four-bedroom home in Woodbridge, Va., about 27 miles southwest of Washington, recently attracted 12 offers and sold for $217,000, far above the $175,900 asking price set by the foreclosing lender, says James Nellis II, an agent at RE/MAX Allegiance. It helped that the lender installed new carpeting before putting the house on the market. The same home had sold for $350,000 just two years earlier.

Though the lower end of the housing market is generally stronger, the upper end remains weak. That’s largely because potential buyers either can’t sell their current homes or can’t qualify for mortgage loans at attractive rates. Michele Francine, a real estate agent in Santa Monica, Calif., has been trying to sell her own home there for about four months. She says the three-bedroom, 1,875-square-foot home is four blocks from the beach and appraised for about $1.6 million two years ago. She’s offering it at about $1.36 million but says few potential buyers can qualify for loans of the size needed.

“It’s a bad time to sell,” Ms. Francine says. “Good time to buy if you have all cash.” She’s now seriously considering renting the home out for $4,950 a month rather than selling in a tough market

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