Is It Time To Buy
Or Sell in Real Estate?

When Federal Reserve Chairman Alan Greenspan used the word "froth" in connection with the current real-estate market last week, he was rather late to the party. Economists, pundits and journalists have been saying for months that the real-estate market is overheated. About the only people who aren't fretting about soaring real-estate prices are the ever-upbeat real-estate brokers (and even they will say, off the record, that the market is crazy) and, of course, investors making their deposits on unbuilt Florida condos.

Can all these Cassandras actually be right? After all, markets usually factor in the conventional wisdom, and prices are set accordingly. If everyone believes that real-estate prices are about to implode, they already would have imploded.

Despite the current chorus of caution, buyers still are lining up to buy real estate. Just yesterday, we learned that existing home sales jumped 4.5% in April to a record 7.18 million units, according to the National Association of Realtors -- far stronger than the flat reading economists were expecting.

I'm not convinced that real estate is in a bubble, or that prices necessarily are headed for an imminent collapse. I'm not selling my apartment or my weekend house in upstate New York to try to capitalize on a market peak.

On the other hand, I wouldn't dream of putting more money into real estate right now, and I wouldn't want to be overleveraged with big mortgages in order to cash in on rising home prices. I can't foresee the future, but I can say to a near certainty that real-estate prices won't keep soaring at an annualized rate in excess of 20%, as they did last year in some areas.

But all of this prompts an important question for first-time home buyers, people who just want a decent place to live and some security for their families. What's someone to do who's stuck paying rent and watching his or her savings steadily fall behind rising home prices?

I know the feeling. I remember vividly trying to save the money for a down payment on a New York apartment during the early and mid-1980s, another period of fast-rising real-estate prices. The more I saved, the more I fell behind. Finally, after 10 years of renting, I landed a book advance that, along with all my savings, became the down payment on a modest apartment. I was convinced I was buying at the top.

New York real-estate prices did plunge, but not until 1991, and they never got as low as the price I paid. So despite my own concerns about high real-estate prices, my advice to first-time buyers who want to purchase a primary residence and who can manage the down payment and monthly mortgage payments, is to ignore all this talk about an overheated market and the likelihood of a coming collapse in prices. Think of real estate less as an investment, and more as a consumer durable -- a necessity.

Even if prices go down, you still will own an asset. If you enjoy it and can meet the monthly payments, what difference does the market value make? I feel the same way regarding people who boast about the soaring value of their homes. So what? Unless they plan to sell it now, and downsize, or move into a less expensive place (highly unlikely), they're no better or worse off than they were before prices took off. And if they're planning to trade up, the even bigger or more luxurious place down the block has appreciated even more than theirs.

First-time buyers can take some comfort that even if they do buy at the top and prices drop, other real estate also will decline. If they want to sell, even at a loss, and trade up to something better, that new home also will have dropped in price. Whatever happens to prices, owning real estate at least puts you on the elevator. You won't be stuck waiting in the basement while everyone else ascends to the penthouse.

Let me emphasize that this advice goes only for first-time buyers of primary residences, though I might also make an exception for buyers who are looking for a second home for their own use and can comfortably afford the payments.

It's true that the real-estate market isn't like the stock market: It moves in longer cycles, and it is less prone to sudden price shifts, let alone collapses. But once a negative market psychology sets in, the decline in real estate can be long and painful, as the 1991 recession made clear for many homeowners. I believe that over time, real estate returns, like those of other asset classes, will revert to their historical norm, which is a markedly lower rate of return than stocks. That means the longer the current boom keeps going, the longer, and harder, the fall.

Email your comments to rjeditor@dowjones.com.