Seeing so many foreclosures hit the market, and watching what has happened with prices, has left many buyers with a bargain-basement mentality, agents say. It's also drawing in longtime renters who see opportunities.

Donny Epp, a graphic designer in Fayetteville, Ark., and his wife have been paying $700 a month to rent an apartment and decided they could buy a place for not much more in monthly costs — even while paying close to the listed price. On Nov. 23, they signed a contract for a three-bedroom house listed for $115,000, for which the seller is offering to pay closing costs; that will lower the Epps' total costs by 3%.

Although Epp has seen several friends lose money on homes they've bought, he says he isn't worried. Epp says he can't imagine the house being sold for much less than what he'll be paying, and it is close enough to the local university that he's confident he could rent it if he wanted.

"It wasn't about finding the best steal of a deal," Epp says. "We saved our money and wanted to find a place we'll feel comfortable in. I'm not interested in low-balling anyone."

Mortgage deduction in peril?
Any proposal to take away the tax deductibility of mortgage interest is a long shot. Given the power of the real-estate lobby, these plans would face an uphill battle in Congress. One option — suggested by Alan Simpson, a former Republican senator from Wyoming, and Erskine Bowles, who was White House chief of staff during the Clinton administration — proposes abolishing the deduction entirely, while a second option would eliminate it for second homes, home-equity mortgages and mortgages of more than $500,000. An alternate plan from a Bipartisan Policy Center task force led by Alice Rivlin, former director of the Office of Management and Budget in the Clinton adminstration, and Pete Domenici, a former Republican senator from New Mexico, would convert the itemized deduction to a flat 15% tax credit, up to $25,000 for all taxpayers on a principal residence. This would make it beneficial for lower-income taxpayers who don't itemize.

Kyle Wissel, a principal in the real-estate group at New York City accounting firm Weiser Mazars, says he doubts a major curtailment of the deduction would curb people's desire to buy a home.

"At (a price cap of) half a million dollars, what you're excluding is a fairly small minority of purchasers," he says of the second Simpson-Bowles plan. "It won't (affect) a lot of those people, who in some cases, weren't itemizing anyway, so it won't make a difference to them."

Some real-estate brokers say it's just a matter of time before excess inventory is worked off and the employment outlook improves to the point where home prices increase again. Markets that already have stabilized tend to have large government, educational or military facilities nearby, Humphries says. For example, the steady presence of more than 200,000 Marines and their families at Camp Lejeune, N.C., provides a higher comfort level for would-be buyers in nearby Jacksonville, N.C.

On Nov. 19, Matt Abercrombie, a Marine sergeant and mechanical engineer, and his wife, Megan, closed on a four-bedroom house in what she describes as "an upscale, boutique neighborhood with good-size acreage." It's the third house they've owned in the six years Matt Abercrombie has been stationed there. Their thinking "wasn't so much 'this is a fantastic investment' as 'this house really suits our needs, and we see ourselves staying here over the long term,'" Megan Abercrombie says. It was a bonus that the appraisal for the mortgage came in $20,000 higher than the purchase price.

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Charles Moore, owner of McGuire Real Estate in San Francisco and a third-generation broker, says he sees the psychological reset among prospective homebuyers as a return to attitudes that prevailed before the 1970s, when inflation drove up home prices in California and other hot markets. He says he doesn't fault people for hesitating to jump in now; they're simply exercising all the diligence that homebuyers largely abandoned earlier in the decade.

"Not only am I not overly alarmed by it, but in a way, I'd say this was necessary for the market to adjust from this bubble effect to (a more realistic) value," Moore says. "'Ozzie and Harriet' buyers didn't expect any return on investment."

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