WASHINGTON/NEW YORK - The U.S. government will pull the plug soon on a popular tax credit that has helped prop up the struggling housing sector amid hope that a pickup in hiring will give the market a fresh shot of life.

Housing's fledgling recovery has leaned heavily on a popular tax credit worth up to $8,000 for first-time buyers and purchases of mortgage-backed securities by the Federal Reserve that have lowered interest rates on home loans.

With the Fed's $1.4 trillion in mortgage-related debt purchases ending next month and the tax credit expiring in June, there is concern the market might relapse and jeopardize the economy's recovery from its worst downturn in 70 years.

Fears have also been voiced that mortgage rates could rise sharply. Analysts reckon a rush by buyers to beat the June 30 deadline for the tax credit will boost sales in the traditionally busy spring selling period, but they expect a brief lull in the second half of the year.

Sales are then expected to pick up as the economic recovery filters through to the labor market, increasing demand.

It (recovery) will continue. What I am counting on to bolster demand in the second half of this year is continuing economic expansion, said David Crowe, chief economist at the National Association of Home Builders in Washington.

Sales will be driven by pent up demand along with low house prices and a return to positive employment growth.

Other economists agree. The labor market, hard hit by the housing-led recession, is expected to start showing job growth as early as March. The jobless rate has dropped from a 26-year high of 10.1 percent in October to 9.7 percent last month.

While mortgage rates are expected to rise by as much as a half-percentage point when the Fed's purchasing program ends, economists expect home loans will remain at affordable levels.

Home prices are now down almost 30 percent from when they peaked in 2006, so even a 50 or 100 basis points move in the mortgage rates is not going to do substantial damage to the housing recovery, said Torsten Slok, an economist at Deutsche Bank in New York. A basis point is 1/100th of a percentage point.

HOUSING CANNOT FALTER

The rate for the 30-year fixed mortgage averaged 4.93 percent in the week ended February 18, according to data from Freddie Mac, and analysts said the rate would have to rise to 6 percent to discourage potential home buyers.

Some analysts expect the Fed to step back into the mortgage market if rates rise too high.

They can't allow the housing market to falter from here. If you are under 6.0 percent, affordability is still your friend. Sales won't be affected, said Josh Levin, a homebuilder analyst at Citigroup in New York.

Analysts said greater stabilization in the labor market contributed to a decline in mortgage loan delinquencies in the fourth quarter from the July-September period and a fall in the percentage of loans on which foreclosure actions were started.

The decline in delinquencies and foreclosures suggests a self-sustaining recovery is building.

Also boding well for a continued market recovery was a steady reduction in the number of homes on the market.

Economists at Deutsche Bank in New York noted that household formation was starting to run above the number of new homes coming on the market -- yet another factor that should support the sector.

Foreclosures remain a problem, however.

There are currently about 5.5 million mortgages either seriously delinquent or in some stage of foreclosure, said Michelle Meyer, an economist at Barclays Capital in New York.

We expect the pace at which these foreclosed properties enter the market as re-sales to accelerate in the near term, likely exceeding demand and, therefore, increasing the stock of distressed properties.

According to Meyer, the speed at which the foreclosed properties enter the market was key to gauging the risk to the housing recovery.

If there are a flood of foreclosured homes, prices will likely take a further tumble and new homebuilding activity would take a hit.

Apart from foreclosures, builders are also worried they may not be able to access loans to meet the anticipated rise in demand from the pick up in employment.

Right now homebuilders are finding it extremely difficult to borrow money to build houses. If that continues ... the builder won't be able to borrow money to build to the demand I expect to see as jobs are created, said the National Association of Home Builders's Crowe.

For some builders the time is just not right to end the incentives.

I'm not sure this is the time for government to start putting back on their support for housing, Michael Sivage, chief executive officer of Sivage Home, which has operations in Texas and New Mexico.

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