If you squint hard enough and cherry-pick the numbers, you can find signs that demand for residential real estate is rising in some parts of the country and house values could start recovering in 2008.

It seems there's bad news for the housing market every day: More mortgage resets are coming in the next year, lenders are tightening standards and homes continue to pour onto the market. All point to sinking home values in the near future.

The National Association of Realtors says sales of existing single-family homes dropped 8.6 percent to a seasonally adjusted annual rate of 4.38 million in September, compared to a pace of 4.79 million in August. That rate is 19.8 percent below the 5.46 million-unit pace from September 2006. What's more, the median existing single-family home price was $210,200 in September, down 4.9 percent from the same time last year. But there are also some encouraging signs, according to Lawrence Yun, chief economist for the Realtors. He believes home values might start recovering next year. He bases his optimism on job growth and a rising stock market. He says that many people who may have been priced out of the market haven't yet returned due to a lack of confidence and a continuing bad news.

"Many people may just be wondering if it is better to buy later rather than now. Whether that is now or later, buyers are (and will be) able to re-enter the market at a more attractive price and a much larger selection of inventory," Yun says. "Mortgage rates are still favorable." As desperate sellers are forced to cut their asking prices and as homebuilders slash prices to get rid of excess inventory, Yun believes it is inevitable that some of those bargain shoppers will jump at offers and, in turn, slowly put upward pressure on sales and prices.

Yun says Utah has still seen growth and believes Texas is ripe for price gains because of the strong job growth. Much of the south — except for Florida — has remained stable. With declining inventories, he also expects Denver and Boston to switch to positive pricing in the near future.

Moody's Economy.com economist Patrick McPherron isn't so confident about a fast housing recovery and expects the market to stay down at least through 2008. He says that a weakening in the economy and financial markets, combined with higher guidelines for mortgage lending, will drive down demand. The homeownership rate peaked at 69.2 percent in 2004 and now stands at 68.2 percent. McPherron says that 1 percent difference may seem insignificant, but it shows a steady decline and means that a lot more homes will likely go unsold. "There is constant pressure on supply that is just now starting to alleviate, and you have all these additional homes coming in because of foreclosures and short sales. You now have an enormous amount of supply facing restricted demand and prices have to come down (further)," says McPherron.

Paul Kasriel, chief economist with Northern Trust in Chicago, also anticipates further weakening in the housing market because of growing inventories. He also believes that the wave of foreclosures isn't over and points to the $683 billion in subprime mortgages that are due to reset between now and the end of 2008. Those foreclosures will put even more homes on the market that will likely be sold at a discount by creditors that take possession of the homes.

"I think you'll see an increase in auctions with prices being slashed. I think prices are still going to be weakening for a while and it looks as though we're only in the early stages of homeowners capitulating in terms of their asking prices," says Kasriel.

While the housing downturn may not be good for the overextended homeowner or mortgage lender left holding the bag, many economists agree that it is healthy to make a transition to a housing market driven on fundamentals instead of speculation. McPherron says that in recent years, homes were being treated more as assets than consumption goods. That mindset, combined with low interest rates and new mortgage innovations, including interest-only loans and teaser-rate adjustable mortgages, caused people to rush into houses not in search of shelter but high returns. "The shift is going back toward the real value of the home because the price is so high that people are wondering if they should be in a home or if they could wait for a year for prices to come down," McPherron says. The benchmark 30-year fixed-rate mortgage rose 5 basis points to 6.34 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.38 discount and origination points. One year ago, the mortgage index was 6.32 percent; four weeks ago, it was 6.5 percent.

The benchmark 15-year fixed-rate mortgage rose 5 basis points to 6.04 percent. The benchmark 5/1 adjustable-rate mortgage fell 4 basis points to 6.18 percent, largely in reaction to last week's Fed rate cut.