Great deals in real estate: Why they won't last

Federal subsidies, low interest rates, and falling home prices have made real estate seem like a good deal recently. But that might not be the case for long.

Americans aiming to buy a home may want to take a cue from Scott Stern: Get on the stick.

He and his wife decided to look for a new home this winter in greater St. Louis County. It's been a good hunting season. "We're seeing attractive homes priced 25 to 40 percent lower than 12 months ago," he says. "That situation won't last long."

Mr. Stern should know. As CEO of Lenders One, a St. Louis-based cooperative of US mortgage bankers, he sees hotter competition for houses on the horizon and the gradual unraveling of the best market for home buyers in decades. Indeed, the rare combination of falling home prices, historically low interest rates, and special federal tax credits for house purchases will be coming to an end beginning this spring.

"Some schools of thought say that [the best time for home buyers this year] will be in the first quarter," says Guy Cecala, publisher of Inside Mortgage Finance, a Bethesda, Md., newsletter.

Here are three factors that will start to work against home buyers in the months ahead:

1. Interest rates are likely to rise. By March 31, the Federal Reserve is set to end its special program to buy up to $1.25 trillion of mortgage-backed securities (MBS). Unless ample replacement buying turns up – or the Fed extends its MBS supports – mortgage rates will rise to attract private investors, many experts predict. "We're factoring that" issue "into our rate forecast," says Michael Fratantoni, vice president of single family research at the Mortgage Bankers Association. By year's end, the rate on 30-year fixed-rate mortgages should reach about 6.1 percent, according to the MBA. That's up from an average 5.01 percent for the week ended Feb. 4, according to Freddie Mac data.

2. Federal home buyer tax credits will end. Late last year, Washington extended the stimulus program that provides up to $8,000 in tax credits to qualified first-time home buyers. And it expanded that program to provide up to $6,500 in tax credits for current home-owners buying a new principal residence.

But the credits apply to sales occurring by April 30 (or June 30 if there's a binding sales contract in place by April 30).

And "there's no real hope that the program will be extended again," says Walter Molony, a spokesman for the National Association of Realtors (NAR) in Washington, D.C.

3. Home prices will start to turn up. The timing is a little iffy here. Nationally, many experts say, the plunge in home prices should end by midyear – or even earlier.

Right now, it would take seven months to sell the current inventory of homes on the market, says Lawrence Yun, the NAR's chief economist, which is close to supply-demand balance. "Any price declines from here would be minimal," he says. "And there's a better chance of price increases, since inventories are at manageable levels."

One uncertainty is the impact of foreclosures. Since foreclosures could equal or slightly exceed last year's record levels, some analysts say that will weigh on housing prices this year. Not Mr. Yun: "Buyers are now willing to purchase these properties," he says. "As long as buyers are clearing off inventory quickly, [foreclosures] won't be a depressing factor."

For its part, the MBA expects about a 5 percent rise this year in the volume of mortgages for home purchases.

However enticing conditions may be, house hunters do need to be savvy. Lending standards remain tighter than they were several years ago. And to avoid the mortgage debacles of the recent past, potential buyers need to act prudently, experts say. "If you stay within your budget, you'll have much less risk of running into [financial] problems," says Yun. "Later, you can trade up" for something fancier. "That's the old-fashioned way of buying a home."