Reports that Goldman Sachs Group Inc. is negotiating to buy affordable-housing tax credits is the latest sign that the market for the credits could be on the road to recovery after more than two years of disarray.

Demand for the credits, a key mechanism for increasing the supply of below-market-rate apartments, evaporated when the economy went into recession and financial companies -- the traditional buyers of the credits -- could no longer use the credits because they were without profits that needed shielding from taxes.

But as the economy has started to rebound and some financial companies are returning to profitability, demand for the credits is starting to pick up again.

"Between the fall of 2008 and 2009, we weren't able to close any transactions," said Mark Carbone , an executive at New York-based Related Cos., one of the nation's largest owners and developers of affordable housing. But in the past two months the company has closed on three new purchases including a $28.6 million purchase in Syracuse, N.Y., and a $38 million transaction in Far Rockaway, N.Y., and has five more in the pipeline. However, he added, "five of the eight are being funded with stimulus money," Mr. Carbone said, referring to a tax-credit exchange program included in the economic stimulus package enacted in February.

"We're seeing a big pickup in starts now," said Richard Richman, founder of the Richman Group, a tax-credit syndicator, a middleman that buys credits from developers and sells them to investors.

The tax-credit program was created in 1986 and has been responsible for the construction of more than a million below-market-rate apartments. To receive credits, which can be worth between 30% and 60% of a project's cost, housing developers promise to keep rents affordable to people who make less than 60% of the area's median income. Many developers sell the credits to large financial institutions that want tax breaks or need to comply with the 1976 Community Reinvestment Act, which mandates that banks invest and make loans in traditionally under-served neighborhoods.

The program is widely considered a successful blend of government subsidy and free-market enterprise. Projects have a low default rate and can serve the homeless, mentally ill and other needy members of the community. Rent restrictions can last from 15 to 40 years.

Investments in low-income housing tax credits dropped to $5.5 billion last year from $8.4 billion in 2007 and are expected to fall further this year to $4.5 billion, according to a recent survey by Ernst & Young.

Meanwhile, credits are being sold for between 65 and 79 cents on the dollar, according to developers. By comparison in 2007, a developer could expect 95 cents on the dollar.

"I think we've hit bottom for prices for tax credits," Mr. Richman said, who recently closed a $100 million transaction to buy a block in Harlem, N.Y., that was financed with stimulus money. "The banks have a need to continue to make CRA investments. That hasn't gone away."

But Fannie Mae and Freddie Mac , the two giant mortgage companies that once bought 40% of all available tax credits, mightn't be significant buyers in the near future. Today, Fannie has billions of dollars in unused tax credits on its balance sheet.

Goldman Sachs is in talks to buy millions of dollars of tax credits from Fannie Mae. But the deal has drawn criticism from Treasury Department officials and others because, among other things, it wouldn't directly finance new affordable housing construction.

But housing advocates say that an active secondary market for existing tax credits could encourage other financial institutions to buy new credits on the prospect that they could sell the credits if needed in the future.

Goldman's interest in credits "is very good for the market," said Ghebre Selassie Mehreteab , an adviser to affordable-housing developers and the former chief executive of NHP Foundation, a nonprofit developer that had to scale back its Gulf Coast development last year from 3,000 to 1,500 units because of a lack of investment.

Citi Community Capital, a unit of Citigroup Inc., rolled out a $1 billion program in September dedicated to investing in low-income housing. (The bank has more than $3 billion of existing tax credits on its balance sheet, but says it has no plans to sell them.) The initiative will invest $500 million in equity by buying low-income-housing tax credits and devote a roughly equal amount to financing construction loans for projects across the country.

"This is us stepping back into the market," said Andrew Ditton , co-head of Citi Community, which invested just $150 million in tax credits last year. "Hopefully in a constructive but aggressive way."