(From SMARTMONEY)      By James B. Stewart 

So the real estate boom is finally over. I say good riddance.

What will we all find to talk about? I for one was getting tired of those self-congratulatory anecdotes about soaring prices in Las Vegas, Miami, Beverly Hills, the Hamptons and . . . you fill in the blank. By contrast, no one wants to hear about my neighbor's house in upstate New York. It found a buyer at $595,000 in April, only to sell for $400,000 two months later after the first deal fell through.

Think for a moment: What did those rising real estate values actually do for you? True, if you are a homeowner, you may have felt richer, and your net worth rose. Maybe you spent a little more freely -- the so-called wealth effect. But unless you actually sold investment real estate and made a killing, most of these alleged benefits were pretty abstract. Real estate isn't a liquid asset. Even if you sold your home, you had to find someplace to live at an equally inflated price.

Plenty of people borrowed against their rising home equity to finance other purchases and felt flush with cash. But that money still has to be repaid, with interest. People who went too far may come to regret the easy credit made possible by rising home values. No wonder former Federal Reserve chairman Alan Greenspan repeatedly expressed his concerns about overinflated real estate prices and their potential to damage the broad economy.

There's little doubt now that this year marks a potentially historic turn in the market. In September the Office of Federal Housing Enterprise Oversight reported that the decline in the rate of price appreciation for U.S. real estate was the sharpest since the office began keeping records in 1975. Although the decline was nationwide, it was steepest in two of the states where prices had soared the most -- Arizona and Florida. The data included refinancings as well as sales; if it had shown home sales alone, the numbers would have been even weaker.

Keep in mind that this reflected data through June 30. Other statistics, including August's drops of more than 4 percent in the number of new and existing home sales, as well as swelling inventories of unsold properties, suggest this trend accelerated during the summer. OFHEO reported that prices still rose a modest 1.17 percent during the second quarter, down sharply from the previous quarter. And that has almost certainly dropped further, possibly even into negative territory.

The national numbers also mask sharp variations in regional markets. In Boston, Detroit, Pittsburgh and Portland, Maine, prices actually declined in the quarter. Miami, Portland, Ore., Salt Lake City, Seattle and Wilmington, N.C., were still surging at annualized rates of close to 16 percent or above, at least as of June 30. (You can look up your own metropolitan area on OFHEO's Web site, www.ofheo.gov, which has data for every quarter going back to the mid-'80s.)

To hear some market forecasters, this is the worst thing for the stock market since the tech bubble imploded. It's true that housing casts a long shadow over the economy, but I think such comparisons are unwarranted. The economy isn't in a recession, 30-year mortgage rates remain low by historical measures, and demographic trends are favorable for new-household formation and housing demand. While the baby boomers may be nearing retirement, they're living longer than ever, and a newer baby boom is now graduating from college and entering the workforce. This isn't a recipe for a collapse in housing prices.

The current abrupt slowdown strikes me as a healthy reaction to the recent speculation fueled by superlow interest rates and easy credit. Tales of buyers lining up to snap up multiple units in still-unbuilt condos in Miami and Las Vegas are no measure of fundamental demand, but of speculative excess. These are the same people who will now suffer the most, unless they've already flipped those units and moved on to something other than real estate. It's hard to feel too sorry for them.

Where does this leave the rest of us?

If you've been waiting to shop for a home, vacation property or rental real estate, it might be time to start looking, or at least browsing real estate Web sites. There's no rush: This is still the early stage of what may be a protracted slowdown, and it takes time for sellers to lower their expectations after years of soaring prices. Even so, there are always some people who have to sell-like my neighbors upstate. If you like something, it can't hurt to make a low bid and see what happens.

If you're not taking the plunge into actual real estate, the closest proxy is real estate investment trusts, which offer a wide variety of ways to invest in the sector. There are more than 200 publicly traded REITs specializing in everything from hotels to storage sheds to timber. But you wouldn't know there was a slowdown in real estate prices by looking at the average REIT. In early September the MSCI U.S. REIT index was near its all-time high and showed a one-year return of 22 percent. Boston Properties, which I consider a blue-chip commercial-property REIT, was trading near its all-time high and yielding just 2.7 percent. (Because REITs are required to pay 90 percent of their taxable income in dividends, their high yields are often one of their most attractive features.) You can earn more than that in money-market funds.

In short, most REITs remain highly overvalued, in my view. In theory, all the reduced expectations for real estate should be factored into REIT prices, so it's a paradox that they've continued to soar. It's true that many REITs focus on commercial property, where rents remain strong. But eventually, slowing home values should put a dent in the sector. I'll leave that to the economists to figure out, but in the meantime, I'm staying clear of them.

By contrast, the stocks of many home builders have been so battered that you'd think the hard landing feared by many was already upon us. Pulte Homes (PHM), recommended in SmartMoney's midyear outlook ("Where to Invest Now," July), recently traded at $29, down from a 52-week high of $46, with a price/earnings ratio of 9. Toll Brothers (TOL) was at $26, half its yearly high of $49. Its P/E was under 9. Toll helped trigger the rout when it announced a 48 percent drop in orders in mid-August.

I believe both of these stocks are attractive long-term investments. As my colleague Russell Pearlman reported in the July issue, Pulte specializes in retirement communities, which positions it to benefit from the imminent retirement of baby boomers. Toll caters to the high-end market, which should be less affected by high gas prices and mortgage rates.

Another way to bet that investors have overreacted to the slowdown is an exchange-traded fund, such as the Power-Shares Dynamic Building and Construction Portfolio (PKB, $15). It offers greater diversification, although it includes home builders as well as construction-oriented retailers like Home Depot and equipment makers like Caterpillar, two companies I like whose shares have also been depressed by real estate fears.

Just as with real estate, I can't say that the home-building sector has hit bottom. There may still be further declines. No one knows for sure just where the real estate market is headed, or how severe the downturn may be. But if you wait until the uncertainty is resolved and the accompanying risk diminished, most of the gains will already be gone. What I can say for sure is that the price of these stocks has been cut nearly in half. Just like a house whose price has been slashed, this strikes me as a bargain. When the next real estate boom rolls around, you'll be sitting on plenty of gains-and a new round of anecdotes if you want to impress your friends.