Three years ago the choices for entry-level buyers like Sarah Kiefer were so meager that with a budget of just $120,000 she all but gave up on buying a house.

The down market revived that dream.

This week, Kiefer will close on a Colonial-style fixer-upper in north Minneapolis with 1,800 square feet and a fireplace for $75,000.

"My No. 1 goal in life was to own a home," she said. "And in this market I could afford to buy a house."

She had plenty of choices. This month more than 2,600 houses were on the market at less than $120,000 -- a 608 percent increase over the same period in 2005, according to the Minneapolis Area Association of Realtors. The inventory for all price ranges increased 62 percent over 2005.

The return of the starter house is the upside of the down housing market. And buyers are taking notice.

Sales in the sub-$120,000 price range -- the only segment of the market that has shown any sign of growth -- rose 79 percent during the past three years, even while sales across the board fell 34 percent. Many of the bargains are foreclosures and condominium conversions in inner-city neighborhoods, but there are also hundreds of single-family houses and townhouses in outlying suburbs.

Kevin Ellis, an account executive for an insurance company who just closed on a $118,000 house in the Camden neighborhood in Minneapolis, said that during the boom he'd been wooed by loan officers who said he could easily qualify for a mortgage of more than $300,000, the amount needed to buy a decent house at the time. But Ellis balked because it would have stretched his finances.

That foresight turned into what he hopes will be instant equity and a quality of life that he couldn't afford just three years ago.

"We lucked out," Ellis said of the 2,000-square-foot Cape Cod-style house he bought last month. "We're stuck with foreclosures by the thousands, but that worked out in my favor. It's unfortunate for those poor people, but it will benefit those people buying right now."

By mid-2006 the median sale price had begun to decline in large part because many first-time buyers were getting priced out of the market, making it difficult for move-up buyers to sell.

"It was clear to me that as exciting as it was, it was not something that was sustainable," said Matt Baker, branch vice president for Coldwell Banker Burnet's Minneapolis Lakes office. "You could look at the [price] curve and realize that it wouldn't be long before no one would be able to purchase a home."

Since then, the credit markets have been shaken, and record foreclosures and defaults have swelled low-priced listings.

As of May 1, banks owned 52 percent of the houses for sale at less than $120,000, according to a recent report by Aaron Dickinson, a sales agent with Edina Realty, and Jeff Allen, research manager for the Minneapolis Area Association of Realtors. That includes houses in default, those that have gone through foreclosure and those approved for a short sale, which means the lender is willing to sell for some percentage of what's owed to avoid repossession.

That percentage dwindles as the market value of the home increases because low-income borrowers are much more likely to have a high-cost or exotic mortgage, those most likely to land in foreclosure.

For example, banks owned just 8.5 percent of the listings in the $350,000 to $500,000 range and 1.2 percent of the listings at $1 million and more.

Balloon payments, adjustable rate mortgages and market declines hit low-income borrowers first, Dickinson said.

The mortgage interest rate shocks aren't over yet. The biggest wave of adjustable-rate mortgage hikes is set to strike later this year, and that brings with it the threat of more defaults and foreclosures. And many of the least expensive houses were bought with small or no downpayments.

Baker also attributes some of the entry-level price declines, which he calls "price improvements," to the fact that defensive lenders allow fewer buyers to roll closing costs into their mortgages these days.

While the shift has been a boon to first-time buyers and investors, the trend is also a concern to neighborhood advocates who fear bottom-feeder investors will start sweeping up abandoned and neglected properties.

That's why a group of real estate agents and residents in north Minneapolis, which has been hit particularly hard by foreclosures, have created a public-relations campaign aimed at changing attitudes and attracting buyers who intend to occupy those houses.

North Minneapolis -- NOMI, for short -- will pitch the slogan, "Get to Know Me" on T-shirts, coffee mugs and posters at the June Arts Party in North Commons Park.

Sandy Loescher of Sandy Green Realty, who specializes in working with buyers in Minneapolis, said bargain seekers still must be prepared to roll up their sleeves and do some work.

Kiefer's house, for example, had been robbed of its copper plumbing. And even though the deal hasn't closed yet, she must stop by the house when it rains to put buckets under the leaky roof.

Some people fare better. After two years of repairing her credit, saving money and taking homeownership classes, Tonia Brinston said she found a "mint-condition" four-bedroom, two-bath house near Victory Memorial Drive in north Minneapolis for just $124,000.

Rodolfo Trujillo of ReMax Results said the market is opening more geographic options for his lower-income clients.

One client, for example, has been shopping for a three-bedroom, two-bath house from $170,000 to $185,000 and this weekend has 10 showings scheduled in Twin Cities suburbs, including Richfield and Bloomington.

"Three years ago they wouldn't have been able to look in the areas we're looking in now," Trujillo said. "There just weren't the listings."

Jim Buchta • 612-673-7376