A. Yes. And no.

As most of you know, I’ve been bearish on home prices since 2002, when I first began warning my clients to stay out of real estate investments if at all possible. Sell your home now and rent, I told them. The economic news has continued to be dire since then, and there are few signs of a lasting recovery in sight. And yet, somehow, the stock market has been rising steadily, which bodes well for the real estate market as well. What’s going on?

Certainly there is plenty of reason to fear another downward spiral in prices. The lending environment is, shall we say, challenging. A large proportion of recent sales have been foreclosures and their close cousin, short sales. (A short sale is simply a sale in which the purchase price is not sufficient to pay off the mortgage.) And we can expect wave after wave of foreclosures in the future as people struggle to pay their mortgages while out of work and unable to find jobs. Things look pretty grim. And yet.

And yet, stocks have bounced back strongly from their lows last year. What gives? The Yale economist Robert J. Shiller may have an answer. He suggested recently that home prices aren’t tied so much to economic data as they are to homebuyer sentiment. Indeed, if you ask around, many people are enthusiastic about the prospects for improvement in real estate prices. There seems to be a general sentiment of optimism among people who have been sidelined by falling prices. If enough momentum develops, recovery could become a self-fulfilling prophecy.

In my opinion, it all hinges on whether there are enough buyers who can still afford to get into the market for real estate.

A: We’ll find out next week.

There was, in fact, a headline on the front page of The New York Times on Sunday, October 12: Those with a Sense of History May Find It’s Time to Invest. To my way of thinking, this is the rough equivalent of The Worst is Over. As you know from my previous post, when The New York Times reports the worst is over, the worst is just beginning. It is entirely possible that the stock market continues to drop sharply next week.

Consider another unattributed article from the Times on the same day. This one was quite clever, comparing today’s news to actual quotes from 1929, just moments before the stock market crash. Here are some excerpts from the piece:

From a “Wall Street Analysis” by Thomas C. Shotwell in “The World Almanac for 1929″:

The market is following natural laws of economics and there is no reason why both prosperity and the market should not continue for years at this high level or even higher.

Irving Fisher, professor of economics at Yale University, in The New York Times, Sept. 6, 1929. He ended up losing much of his wealth in the crash:

There may be a recession in stock prices, but not anything in the nature of a crash.

J.L. Julian, a partner in the financial firm Fenner & Beane, in The New York Times, Oct. 26, 1929:

The worst is over. The selling yesterday was panicky brought on by hysteria. General conditions are good. Our inquiries assure us that throughout the country business is sound.

President Herbert Hoover on Dec. 3, 1929, in a speech before a joint session of Congress:

I am convinced . . . we have re-established confidence. Wages should remain stable. A very large degree of industrial unemployment and suffering which would otherwise have occurred has been prevented.

Treasury Secretary Andrew W. Mellon, Dec. 31, 1929, in a statement issued while he was yachting off Nassau, the Bahamas, on his winter vacation:

I see nothing . . . in the present situation that is either menacing or warrants pessimism. During the winter months there may be some slackness or unemployment but hardly more than at this season each year. I have every confidence that there will be a revival of activity in the spring, and that during the coming year the country will make steady progress.

Sound familiar? Over the next four years, the stock market lost 90% of its value and launched the Great Depression. It took 25 years for the market to recover from the events that began in October of 1929. I wouldn’t invest your child’s college tuition in the markets right now if I were you.

All of this may seem frightening, but don’t worry. There is a limit to how low the stock market can go. That limit is zero.

Data through February 2008, released by Standard & Poor’s for its Shiller Home Price Indices, the leading measure of U.S. home prices, show declines in the prices of existing single family homes across the United States worsened in the second month of the new year, with 17 of the 20 now reporting MSAs [Metropolitan Statistical Areas] posting record low annual declines, 10 of which are in double-digits.

Both of the composite indices are now reporting annual declines in excess of 12.5%. The 10-City Composite posted a new record low annual decline of 13.6%, and the 20-City Composite recorded an annual decline of 12.7%.

“There is no sign of a bottom in the numbers,” says David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s. “Prices of single family homes continue to drop across the nation. All 20 metro areas were in the red for the February-over-January reading. In addition, 19 of the 20 MSAs are still reporting negative annual returns. The monthly data show that every one of the MSAs has now declined every month since September 2007, marking six consecutive months. On top of that, remained steep w the declines have with eight of the 20 MSAs and both composites reporting their single largest monthly decline in February.”

Good news or bad? Stupid question, right? Of course it’s bad news. Well, maybe not, if you read my entry on the Home Price Hype Cycle. In fact, this is just the headline we’re waiting for to signal we are nearing the bottom. Granted, National Realty News is not The New York Times. But keep your eyes open. When a respected, mainstream news organization like the Times publishes that headline, it’s time to breathe a sigh of relief. It’s the first sign that prices are close to bottoming out.

Incidentally, the Times published a headline above the fold in the Mutual Fund Report section on April 6 that read “Almost as if the Sky Were Falling.” Have you noticed that, after a brief dip, the stock market has gone straight up since then? Careful, though. They did say “almost.”

Prices are certainly lower than they were two years ago. In some cases, a lot lower. But that old adage still applies: Just because something has fallen in price doesn’t mean it’s cheap. In fact, I believe we have a long way to go before hitting bottom. It may take years for prices to recover. Whether you should buy depends on the answers to quite a few questions, including: 

• Are you upgrading from a less expensive home? If so, the longer you wait as prices fall, the more you’ll save on the house you buy than you’ll lose on the house you sell.
• Are you downsizing? Then the reverse is true. You’ll lose more on the house you sell than you’ll save on the house you buy. Take action as quickly as possible.
• Will you kick yourself if you miss the next real estate boom?
• Can you imagine yourself renting for a few years? (Hint: it’s what I decided to do when the market peaked.)
• Are you honestly willing to pay a fair market price for your home, or do you demand a bargain?
• Do you have a choice? Or is your employer/spouse/school the real decider-in-chief?

The truth is, buying a home isn’t the right choice for everyone. A good Realtor® will tell you when it isn’t. That’s a sure sign he cares more about helping you in the long term than about making sales in the near term, don’t you think?

Clearly this is a difficult time to sell, with prices falling daily. I expect them to continue to fall for some time. Properties that are priced right, expertly marketed, and carefully shepherded to settlement will sell. Most likely they will sell for less than they would have two years ago. A lot less. Should you sell? Maybe. I don’t mean to be vague, but the answer isn’t the same for everyone. What you should do really depends on your particular situation. Some questions that affect the decision are:

• Are you selling because you want to buy a more expensive home? If so, the longer you wait as prices fall, the more you’ll save on the house you buy than you’ll lose on the house you sell.
• Are you downsizing? Then the reverse is true. You’ll lose more on the house you sell than you’ll save on the house you buy. Take action as quickly as possible.
• Can you afford to wait five years for prices to improve? Ten years?
• Can you make the numbers work by finding someone to rent your house?
• Are you honestly willing to accept a fair market price for your home, or do you demand top dollar?
• Do you have a choice? Or is your employer/spouse/school the real decider-in-chief?

I often advise my clients to stay put. It’s certainly not something you expect to hear from your garden variety Realtor®. But then, you didn’t think I was your garden variety Realtor®, did you?

Fact is, I see my job as helping people, not selling homes. Sound corny? OK. I can live with that.

The cold calls were by far the thing I objected to most. I’ve never liked pushy salespeople, and I didn’t want to become one. So, I did the other things. But to this day, I have not once picked up the phone to solicit business from strangers.

My low-key approach has served me well. More than 90% of my clients are referred by friends or relatives of theirs who have worked with me. I seldom advertise my business.

But when times are tough (now, for example), bringing in a few more clients makes me a happy Realtor®. So I decided to send out some postcards. It’s a kinder, gentler way to attract customers, in my opinion. They went out about a week ago. Here’s what they looked like.

What do you think? Would you mind receiving something like this in the mail? Would you be encouraged to call?

Leave your comments, and I’ll let you know what the response to the mailing was.

This one is purely for fun, but wait till you see how accurate it is. Can you guess where we are in the cycle?

Don’t thank me. Just send money.