(MONEY Magazine) – WELL, SURE, THE '80S, WITH THEIR RUNAWAY real estate values, are finito. Even so, the housing market has been mostly picking up since this decade's gloomy debut. And in '96--unlike in '95--home-price increases could edge out the rate of inflation by as much as a full percentage point.

That means homeowners can expect generally modest gains, and sellers in such hot markets as Salt Lake City; Portland, Ore.; Charlotte, N.C.; and Detroit will walk away even happier. At the same time, falling mortgage rates will gladden buyers, as well as homeowners who refinance or borrow to fund renovations.

The number of new and existing U.S. homes changing hands should drop to 4.79 million next year from 4.81 million in 1995, according to the National Association of Realtors (NAR) in Washington, D.C. But home-price appreciation will be the best it has been in four years, as baby boomers trade up to more expensive houses, lured by low interest rates. An exclusive forecast for Money by the West Chester, Pa. economics consulting firm Regional Financial Associates (RFA) shows that the median home price in the 50 largest U.S. housing markets will increase 3.7% next year, up from a 2.1% gain in 1995. By comparison, most experts--including MONEY's Michael Sivy (see page 32)--expect wage growth and inflation to remain below 3% in 1996.

Of course, housing demand and prices vary significantly from region to region and, depending on the location and type of homes, even within cities. For a preview of the housing market in the community where you live, turn to the table on page 92, which projects median prices for 1996 in the 50 largest U.S. metropolitan areas. No. 1, Salt Lake City, with a 7.8% price hike forecast for next year, should continue to see demand outpace supply so long as computer-related companies like Micron Technology and Iomega fuel a surging local economy. Likewise, opportunities for high-tech employment and attractive lifestyles are expected to lift prices in No. 2 Portland, Ore. (6%) and No. 3 Charlotte, N.C. (5.5%).

Surprisingly, a number of rust belt cities are expected to post gains this year, largely because of a manufacturing resurgence and the dearth of new-home building. As a result, Detroit (4.9%) vaults to No. 4 from last year's No. 30. Cleveland (4.3%) moves up to No. 7 from No. 28. California, just beginning to emerge from recession, continues to occupy the basement of the list: Five of the bottom 10 metro areas are in the Golden State.

Regardless of where you call home, or whether you'll be a buyer, seller or owner in '96, here's advice to keep in mind:

BUYERS. The most encouraging news for buyers over the next 12 months will be the low cost of borrowing. Indeed, conventional 30-year fixed mortgages, recently as high as 7.7%, could slip to 7% in '96, says RFA chief economist Mark Zandi. For most buyers, a conventional 30-year fixed-rate mortgage will be your best bet. Why? The difference between those notes and adjustable-rate mortgages (ARMs)--recently 1.9 percentage points--is expected to narrow even further in 1996. Generally, when that gap falls below two points, experts say fixed-rate mortgages will be less expensive than ARMs in the long run (for more on interest rates and mortgages, see page 86).

Next year's buyers can also take advantage of a growing trend: comparison mortgage shopping via computer. Increasingly real estate brokers can tap into computer networks enabling buyers to compare the loans of various lenders. The loan offerings take into account the buyer's specific needs and circumstances, and in-house financial counselors calculate which deal is most advantageous to the buyer. "Technology is making tailor-made mortgages easier to implement," says Harry Tomlinson, executive vice president with PNC Mortgage in Chicago, which has teamed up with Coldwell Banker to form the Home Mortgage Network.

In any event, don't let mortgage savings distract you from driving a hard bargain on price. "A lot of sellers," says NAR chief economist John Tuccillo, "have been waiting for a long time to sell their house. They'll be willing to negotiate."

One consistently smart strategy, especially in robust markets, is to shop for a home that needs remodeling. That's what Jerry Lyons, 41, and his wife, Heide, 24 (pictured above), did in fast-growing Salt Lake City last June. They selected a $131,000, four-bedroom ranch surrounded by newly constructed, half-million-dollar houses in the desirable, high-priced Cottonwood Heights neighborhood. The house was sorely in need of upgrading, "but that's precisely why we got such a good price," says Jerry, an associate professor in the health sciences division of Salt Lake Community College. So far, the couple have spent $12,000 to add a garage, overhaul the electrical system, replace windows and paint. Their most recent appraisal: $160,000.

SELLERS. Two words for anyone still holding out for double-digit annual appreciation before selling: Get real. "There's no advantage in playing the waiting game," explains William Wheaton, director of the Center for Real Estate at the Massachusetts Institute of Technology in Cambridge, Mass. "Nothing on the horizon says housing is going to take off."

As always, pricing your house appropriately is essential to nailing the sale within 60 to 90 days. If your property languishes any longer, says Jordan Clark, president of the United Homeowners Association, then "people assume there's a problem with the house." To set the right price, get a comparative market analysis from your real estate agent, which will tell you the prices of recently sold similar homes in your area. Then: In strong markets, choose a list price that's 2% to 5% above market value; in weaker areas, undercut the market in the same proportion.

Second only to price in importance is the condition of your home. If you plan to sell in '96, some minor and relatively inexpensive enhancements--say, a fresh coat of paint or a new deck--can dramatically boost your bargaining power. Even better are changes that speak to the latest home-buyer concerns, such as home-security measures. "Fences, alarms, anything that says protection and privacy is becoming more desirable," reports Robert Irwin, author of Buy Your First Home! (Dearborn, $14.95). To learn your market's current hot buttons, ask a few local brokers. Better still, conduct your own research. "Check out newly constructed housing in your area to see what's selling fast," suggests Gary Eldred, author of Yes! You Can Own the Home You Want (John Wiley & Sons, $14.95).

If you plan to keep your house for a few more years, renovation may be the way to a better sale down the road. But the features buyers value are changing as fast as America's demographics--and will likely continue to evolve. For instance, high-end gourmet kitchens are not the surefire attraction they once were. "More and more people are cooking less and less," says MIT's Wheaton. "A $60,000 kitchen improvement might not add that much in value to your home in five years."

The right improvements, however, can significantly increase your home's sale price, particularly if they add practical, day-to-day value. "An extra room is much more likely to return a profit than a pool," says Farrel Winn, a relocation specialist for Coldwell Banker. Consider the example of Boyd Smith (pictured on page 91), a 37-year-old owner of a Pasadena floral business. After buying his two-bedroom house for $208,000 in 1989, he invested $150,000 in new pipes and wiring, as well as the addition of a den and extra bathroom. Smith sold the house last February for $452,000--pocketing a healthy $94,000 despite the region's wan housing market. Says he: "I remodeled for my own comfort, but I never forgot that someday my home would belong to someone else."

Reporter associate: Joan Caplin