The declining Treasure Valley housing market is either nearing bottom or nearing a cliff, depending on which statistic you look at.

Sales are down, but could go up soon. Inventories of unsold homes are still shrinking, a necessity if prices are to stabilize, but foreclosures and distressed listings still dominate the market. Distressed listings include homes that owners are trying to sell before a lender forecloses and properties that banks already own as a result of foreclosures.

A federal tax credit and low prices are luring new-home buyers, but interest rates have risen lately and could lock some out of the market.

Experts say the signs are mostly positive. They're optimistic, but they're still not making predictions.

Median sales prices in Ada County have been stable for three months, while in Canyon County median prices continued to fall, down 7 percent in May. The result is disappointing for sellers and agents after a 3.2 percent increase in April, but not as bad as the 9.3 percent dip in March.

Pending sales - contracts that have been signed but not closed - are way up: 27 percent in Ada County and 39 percent in Canyon County, according to Jere Webb, an agent with Coldwell Banker who publishes Webb Charts, monthly statistics for real estate professionals.

Pending sales usually close within 45 days, so Webb expects the number of homes sold to rise significantly in the next couple months.

Of course, there's a catch. "A number of these could be short sales and bank-owned properties which take longer to close, and are less definite than sales of homes that aren't distressed," Webb said.

If a significant number of these pending contracts are for distressed homes, sales prices will likely continue to fall, since such homes tend to sell below market prices. According to Webb, 37 percent of sales in Ada County and 64 percent in Canyon County in May were distressed.

Rising interest rates are a new nail on the road to recovery. Mortgage rates have been below 5 percent for much of the year.

The historically cheap price for borrowing and tax incentives are credited with bringing a wave of first-time homebuyers into the market. About 50 percent of the local market consists of new-home buyers, said Mike Pennington, residential specialist with John L. Scott Realty.

But mortgage giant Freddie Mac reported a jump in the average 30-year fixed mortgage rate to a 25-week high of 5.29 percent last week.

"High rates will knock those on the cusp of qualifying (for a mortgage) out of the market," Pennington said. "Others will have to buy a bit smaller home than they planned on."

Loan originator Doug Adams with Idaho Street Mortgage said he expects rates to stabilize.

"With news of overseas markets and the bond (returns on U.S. Treasury Bonds are tied closely to mortgage rates) we're hoping it will come back down around 5 percent, but I don't have a crystal ball either," Adams said.

Adams said he was inundated with refinancing applications in March and April, but the pace will slow if rates keep rising.

Another factor slowing closings is a raft of new government regulations and lender requirements.

"What used to take four to five days to underwrite is now taking three to four weeks," Adams said.

Overall, Pennington sees the market trending positively.

"Resale closings have about doubled since January," he said.

"And the total inventory has dropped below 3,000, even though all these foreclosures are coming onto the market. I think we'll see a floor in prices if inventory can continue to shrink. I really believe the worst is behind us, but the recovery is going to be slow and test our patience."

Brad Talbutt: 672-6737