Home sales and price gains in most parts of the U.S. during 2007 aren’t expected to break any records, but there are already signs that the worst of the downturn that began about a year ago is over.

Q: We are thinking of buying our first house, but the market in our area seems soft and I think it might get even worse next year. Should I buy now, or wait and see if prices drop even lower?

A: There’s no question that sales in most parts of the nation have slowed dramatically in the past year, and prices aren’t rising nearly as fast as they were before. Values in some communities actually are lower than they were a year ago, and could slip further in 2007.

Yet, the market isn’t headed into a free-fall, and there’s a growing number of signs that the worst of the slump that began earlier this year already is over. I’m devoting this entire column to providing my annual housing forecast.

Q: How can you be optimistic about next year, when so many economists are saying that the real estate market will continue to weaken?

A: It’s true that some economists and self-proclaimed “housing experts” expect more softening in 2007. But many of those same people have spent the past several years saying that the market was poised for a downturn, and prospective buyers in most areas who followed their advice to stay on the sidelines missed out on the greatest five-year price run-up in real estate history.

Though sales nationwide are expected to decline slightly next year, prices overall are projected to rise between 2 percent and 3 percent – roughly matching the overall rate of inflation. Interest rates already have dropped back near their all-time lows, employment figures are at a record high, and home sellers finally are pricing their property realistically – all of which should help keep the market afloat in 2007 and perhaps even plant the seeds of a recovery around midyear.

Q: What areas are expected to fare best in 2007?

A: Several of the strongest areas next year are expected to be those that didn’t see the double-digit annual gains that many other communities enjoyed in the 2000-to-2005 real estate boom. A report prepared by researchers at the respected economy.com Web site say the most strength probably will be in Texas, much of the Southeast, the Farm Belt and the Pacific Northwest.

It’s worth noting that some parts of the country barely have felt a slowdown at all. Home prices in such diverse markets as Salem, Ore., Salt Lake City and tiny Elmira, N.Y., are still running about 20 percent higher than a year ago, according to a recent report by the National Association of Realtors. Other cities aren’t faring nearly as well, and prices in those areas could even drop in 2007, after years of spiraling higher.

“The highest probability of price declines is in metro areas throughout California, and in and around New York City,” the economy.com report says. “Probabilities are nearly as high in the rest of the Northeast Corridor, many Florida metro areas, and in sundry areas in the Midwest and Mountain West.”

Q: What’s the outlook for rental-property investments?

A: Investors are still bullish on most U.S. rental markets, in part because the long price run-up in for-sale homes has forced millions of Americans to lease instead of buy.

Analysts are particularly bullish on apartments in the Washington, D.C., area; Los Angeles; and other metro areas where employment growth remains strong. But they’re wary of San Diego, Phoenix, parts of Chicago and many communities in Florida – all of which have a glut of condominiums that are driving down apartment rents.