Property prices have fallen 25% from their 2006 peak. The free fall has continued right through the year in 2008. Can it ever get worse than this? Are these prices too lucrative to invest in the real estate market or pick up stocks in real estate? Do we have some economic indicators that would signal the revival of the market? When should one start investing? The answer to this can be found in some history and some economic indicators.

The Great Real Estate Market Crash in Florida in 1920’s saw prices falling down to as high as 80%. The real estate prices in Tokyo’s prime properties in 2004 fell to 10% of its peak.

These statistics only tell you that the extent of a real estate crash cannot be limited to a percentage nor can it tell you the right time to buy. It is time then that you started looking at some economic indicators to guide you better

Indicators of a declining market

Job Losses: With rampant job cuts, home owners will find it difficult to pay off their mortgages while organizations will be stuck with excess office space. Defaulting home owners and organizations with excess space will increase the supply in the market thus bringing a further pressure on the prices of real estate

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Desperate Government Measures: Industries seeking bailout from the Government gives a feeling of the lack of stability in the economy. For real estate prices to begin gaining some momentum there needs to be an environment of confidence which is clearly missing at this point in time. When the situation is desperate it’s better to keep a tab on the market but keep out till you are confident.

Risk Taking ability of Banks:  The willingness of Banks to finance homes with ease also indicates their confidence in the immediate future of the real estate market. With banks stringent with their purse strings, making it difficult to finance a home or office space, buyers would find it more difficult to finance the properties thus creating a lower demand in the market 

How should one then approach the real estate market when one is now sure of the immediate future of the market?

Investing in Realty Stocks

As it goes with any stock, it would be only prudent to check the financials. Realty stocks are at a higher risk due to asset valuation methods. Unrealistic valuation will only mean there would be nothing much left on the right side of the balance sheet. Invest in stocks at a time when the economy is improving and in those stocks that have been known to stand the test of time over a long period of time and believe in fair market valuations.

A smart investor learns from other’s mistakes and gains from his own prudent judgment. Wait and watch for the pending increase in home sales before you put in all your money. You may be able to enter the market at a price marginally higher than the absolute bottom but then you would also be more or less confident that the worst is over.

Here are some stocks that come out clearly as winners for the year ahead in 2009. It would make sense to keep a tab on their progress.

E-House (NYSE: EJ)

E-House is China’s largest real estate agency. The stock has been on the downward trend but the revenues and profits keep going up. It has managed a revenue growth rate of 58.3% in the last 3 years.  Sales were up four fold in the October holiday season on a year-on-year basis. Even in these trying times, revenues and profits are both up by over 90% YOY. E-House has been profitable right from inception and looks attractive at current valuations. Make the most of the downtrend.

Ventas (NYSE: VTR)

If there is one word to describe Ventas, it is prudence. A prudent management that has taken steps right from the early indicators in 2007 is the major contributor to the attractive valuation and prospects. A health care and senior housing REIT, Ventas more than doubled its net income in the 3rd quarter of 2008.

NorthStar Realty Finance  (NYSE: NRF)
Even in this economy of no foreseeable limit to home owners defaulting, Northstar Realty Finance  comes out completely clean with no delinquencies on principal or interest. A liquidity advantage of $280 million and a 35% growth rate assures this company of a strong position in trying times.