In a sign that lower-priced homes might lead the home-construction sector out of the economic downturn, building permits for such homes dominated a sharp jump in home starts here during the first two months of this year compared with the same period last year.

While one industry observer here says he believes the market for higher-priced homes will follow growth in the lower-priced sector, another says the surge in so-called starter homes might simply reflect the true purchasing power of Spokane residents, whose incomes remained modest even during economic growth that preceded the recession. With people being more realistic about what they can afford, he says he doesn't foresee the sales growth rate of pricier homes necessarily tracing that of entry-level homes anytime soon.

In Spokane County and the cities of Spokane and Spokane Valley, 71 building permits were issued for single-family homes in January and February combined, up from 48 permits issued in the year-earlier period.

While that's a noteworthy increase, it's still far below the total of 246 permits issued in those jurisdictions in the first two months of 2007, prior to the recession.

Continuing into March this year, though, Spokane County alone issued 37 building permits in just two weeks. Of those, only six were for homes valued at more than $200,000 and only one of those was valued at more than $300,000.

Joel White, executive officer of the Spokane Home Builders Association, attributes some of the recent increase in home construction to this month's deadline for qualified first-time home buyers to take advantage of an $8,000 federal tax credit.

"They are running short on time," White says. "They've got to have a construction contract locked in by April 30."

He says, however, that association members are seeing an increase in interest beyond first-time buyers.

"I'm optimistic that the market is returning," White says.

In January, 21 new homes were sold in Spokane County at an average of price of $232,700, compared with 20 new homes sold in January 2009, at an average of $325,000, according to the Spokane Association of Realtors' Multiple Listing Service. The average price for new homes sold in February was $230,250, down from an average of $310,500 in February 2009.

Grant Forsyth, an economics professor at Eastern Washington University, says some home builders had built high-end homes too aggressively for the Spokane market in the last few years, possibly due to a false sense that regional economic growth had resulted in widespread individual prosperity prior to the recession.

"During the economic expansion, I think the assumption was that everyone was making $100,000 and that's not the case," Forsyth says. "Even before the recession, real wages hadn't changed much, when adjusted for inflation."

During the last cycle of economic growth prior to the onset of the recession here in 2008, less than 50 percent of Spokane County households had annual incomes of more than $50,000, and less than 25 percent made more than $75,000, he says.

"People didn't have more income to buy more house," he says.

Brian Markham, who owns Markham Homes Inc., of Spokane Valley, has targeted the entry-level market with homes typically priced at under $190,000 since he founded the company in 2004.

"Now, we're working with subcontractors, trying to sharpen our pencils to get down to $169,000," he says.

Markham Homes obtained building permits for nine homes in Spokane County in mid-March, all but two of which were valued at under $166,000, including land. Typical homes in that price range have roughly 1,000 to 1,200 square feet of floor space with two or three bedrooms and an attached garage, he says.

Markham says his company's goal is to develop homes that are affordable to families that make the median income in Spokane County, which the state estimated at $42,200 in 2009.

"A family with that income should be able to afford a $1,000 mortgage and a $300 car payment," he says. "With an interest rate around 5 percent or 6 percent, that comes to a $169,000 house. That's our niche."

That market sector had been overlooked by many other builders who were putting up more expensive houses prior to the recession, Markham says, adding that more builders are tapping into the entry-level market sector now.

Craig Roberts, general manager of sales for Condron Construction, a prominent Spokane home builder, says the company has changed its philosophy to meet lower price points because of low activity in the move-up market.

"We've adjusted down to the market, by downsizing square footage and materials," Roberts says.

He says Condron Construction hopes to sell and build 40 homes this year, up from about 33 homes last year. Most of those will be priced in the low- to mid-$200,000 range, although homes in Condron's planned 17-unit Farr Meadows development in the Pasadena Park Neighborhood near Spokane Valley will be priced at around $175,000, Roberts says.

In recent years, Condron Construction had specialized in developing mid-market homes priced at up to $350,000.

Rob Higgins, executive vice president of the Spokane Association of Realtors, says, "A number of builders have moved to the lower end, because that's where most of the sales activity is. It's partially driven by the first-time home-buyer tax credit."

The median price for all homes sold in Spokane County in the first two months of this year was $172,500, down 14 percent from $200,300 in the year-earlier period.

"It doesn't mean that home values are falling," Higgins says. "That just means more homes are being sold in the lower price range."

White predicts that markets for mid- and upper-priced homes will gain strength behind growth in the entry-level market.

"This cycle has happened numerous times," he says.

Forsyth says, though, that he doesn't see a quick change coming in the market sector for higher-end homes.

"Going forward, people's ability to buy houses is not going to change much," he says. "I think we'll see people with modest wages buying modest houses."

The national mortgage crisis and recession likely even have made affluent perspective home buyers more cautious, Forsyth says.

"People have more realistic expectations of what they can afford," he says.

Also, Forsyth predicts that the Spokane area unemployment rate will remain above 9 percent this year and won't return to a more normal rate of 6 percent until 2013 or later, which will have a dampening effect on home-sale price growth.

"Even for those who have jobs, when the job market is uncertain, it's going to temper the desire to buy an expensive home," he says.

Markham says his company built 60 homes in each of the last two years, and he expects it will build another 60 homes this year. Still, it hasn't been immune from recessionary pressures, he says.

Most of the homes the company is building are pre-sold, although the company is building a few homes speculatively, and it hopes to attract buyers for them this month who want to take advantage of the tax credit.