Cover Story April 2, 2009, 5:00PM EST

Housing: Signs of Life

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But inventories are falling fastest in markets where speculators and first-time buyers are driving the action. Those parties don't have to put their own homes on the market to make a deal. It remains vexingly difficult for home-owners who have bought in the past five or so years to sell one property and buy another.

On top of that, government incentives of up to $8,000 in tax credits for first-time buyers and low mortgage rates engineered by the Federal Reserve are luring shoppers who otherwise would be sitting out. If the government were to take away the punch bowl, markets that seem to be bottoming could well turn down again.

HARD-HIT MARKETS

What's more, banks have tightened their lending standards so much that only the most qualified buyers are finding it easy to get loans. Until financing loosens up, the housing market can't possibly take off.

It's best to view the brisk sales in some markets as glimmers of hope in a national market that seems likely to remain weak for a while. Sales continue to fall in many areas, especially those that didn't get hit until recently. In Charlotte, where home prices were rising until a few months ago, sales dropped 38% in February over the previous year. Nationally, the S&P/Case-Shiller index that tracks home prices in the top 20 metro areas was down 19% in January from a year earlier and 29% from its 2006 peak. "The market is still doing badly," cautions Robert J. Shiller, a professor of economics at Yale University and a creator of the index. But, he adds, "there's always light at the end of the tunnel."

That light could be growing brighter in Las Vegas. Home sales began to drop in Sin City before they fell in most other parts of the country. Now Vegas is deeply mired in recession. Unemployment has risen to 10.1%, far above the national average. More than 80% of the homes for sale are distressed properties, either those where the owner faces foreclosure or those already owned by a bank. Median prices have fallen from $315,000 in June 2006 to $155,603 today, roughly the same level as in 2002.

THE LURE: LOW RATES

Those dizzying price drops are attracting the likes of Mark and Claudia McLaughlin. The couple, who work for the New York State Corrections Dept. and live in Westernville, N.Y., plan to retire in Las Vegas in six years or so. They're eager to find a place while prices are still low. In late March they went house hunting with an agent, checking out 18 homes between $75,000 and $100,000. "We figure we'll buy something now and get a good price on it," says 55-year-old Mark McLaughlin. "We'll rent it out, and it'll pay for itself." They won't need to sell their upstate New York home for years, by which time that local market might have improved.

The Garvins, too, are doubling down while keeping their current home. In 2004, hotel finance manager J.D. Garvin and his wife, Nona, a nurse, paid $202,000 for a 1,200-square-foot townhouse in Las Vegas, which would probably sell for half that today. After the birth of their first child last year, they decided they needed more space. So in late January they bought a 3,800-square-foot home for $300,000 in the suburb of Henderson, Nev.

With prices still low, the Garvins decided to find a tenant for their first home rather than sell it. The rent almost covers the monthly mortgage on their first property. Says 30-year-old J.D. Garvin: "We feel good about the fact that we're paying a little bit more than the other mortgage—and the house is three times as big."

For the Garvins, who weren't eligible for the government tax credit, record-low interest rates were a big enticement. With the rate on their 30-year fixed-rate mortgage at 4.75%, the payment on their $292,000 loan is around $1,600 a month. Nationally, the rate on a 30-year fixed-rate loan averages around 4.85%, the lowest on record.

In California, politicians are adding to the federal inducements. The legislature has passed a $10,000 tax credit available to anyone who buys a newly built home. (Existing homes don't qualify.)

The tax break lured Marisol Monroy to make the switch from renter to owner.