Decreasing inventory levels and increasing sales volume — market conditions that normally reflect a drop in supply and increase in demand — are promising signs the local housing market could be heading for recovery.

The real estate market's revival is due in part to not only the first time home buyer tax credit, but also the Feds program to purchase mortgage-back securities, which is keeping mortgage interest rates at the sub-5 percent level. But at some point, when the intended effect is achieved and the market is in a recovery, these measures will be scaled back.

It was part of the economic stimulus plan announced a year ago. The Federal Reserve began buying mortgage-backed securities to support the housing market and foster improved conditions in financial markets. The program, which began in January and initially was planned to run only through the end of the year, was recently extended through March 2010.

Jeff Bamer, vice president at First Hawaiian Bank, whose job includes setting mortgage rates, says "They are attempting, and succeeding to keep mortgage rates low.

"This helps our economy in several ways but most notably it does two things," says Bamer. "First, low rates encourage potential home buyers to purchase homes, which helps the slumping housing market. Second, the low rates are allowing many families to refinance their existing mortgage and lower their monthly housing expense."

The National Association of Realtors announced this week that existing home sales were strong again in September, marking five gains in the past six months and attribute favorable conditions along with the use of government policy for the boost.

As the stimulus programs wind down, experts are mixed as to whether more intervention is needed. Will the market have gained enough inertia to continue forward or will sales flatline once again? Mortgage rates will likely play a large role and most believe that mortgage rates will begin to rise.

"Thirty year mortgage rates are currently in the high 4's," says Bamer. "The more optimistic forecasts call for rates to rise only about a half percent to the low or mid 5's, while others project for them to go much higher. For prospective home buyers who haven't yet purchased or borrowers who haven't refinanced, the clock is ticking."

Mortgage interest rates have been in record low territory for so long now, they are taken for granted. In fact, had it not been for the Fed's buying up mortgages in an effort to keep interest rates artificially low this year, it is likely that rates would already be significantly up from the bottom. But by next March, these record low rates will most certainly be a thing of the past. Possibly sooner.

"There is no telling for sure, but certainly when the Feds stop buying MBS in March, rates will rise," Bamer warns. "There are many, including me, who think they'll rise before then as all the other investors in the market anticipate the higher yields that will be available later and will stop buying the low yields now."

Once the economy stabilizes and the government intervention is no longer necessary, rates will go up.

Meanwhile, the NAR is appealing to the Senate Banking, Housing and Urban Affairs Committee to extend the $8,000 home buyer tax credit, which expires at the end of the month.

"The data on the present home buyer tax credit show that the credit has had its intended impact; sales (volume) have jumped in recent months to a projected 5.1 million for the year and inventory has been trimmed," says Ron Phipps, NAR's first vice president. "But it is a fragile recovery, and now is the time to build on home sales momentum by extending the tax credit throughout 2010 and expanding it to all home buyers."

Either way, prudent consumers are preparing for rates to rise and planning their strategy.

"Interest rates are a huge consideration for most home buyers," he says. "The higher the interest rate the less most buyers can afford to pay for a home."

He adds, "Get in while the getting is good."

• • •