THE VIEW FROM

the back patio of Greg Stone's three-bedroom house in Reno, Nev., is stupendous. From his lounge chair, he can look across a manicured golf-course green to the stark eastern slope of the Sierra Nevada range. The inside's not too shabby, either, with granite countertops, cherry cabinets and a cozy stone fireplace. As recently as two years ago, with Reno in the middle of a real estate boom, it was easy to imagine a house like this becoming a million-dollar property.

But last fall, when its owners put it on the market for $835,000, there were no takers. For nearly a year, the price sank; by July, when Stone and his wife saw it, it had fallen all the way to $619,000. Stone made a low-ball offer, feeling a little nervous. "We really wanted the house and didn't want to muck it up," says Stone, a college professor. But in Reno these days, buyers have to work pretty hard to sabotage a deal. A week later they signed a contract on the home for $590,000 30% below its original asking price.

The Stones' house could be a tombstone for the recent real estate boom. The long-anticipated slowdown has arrived with a stench of burnt brake pads, with even Federal Reserve Chairman Ben Bernanke saying that the housing sector is undergoing a "substantial correction." In 2005 home prices appreciated 12% nationally. This year the National Association of Realtors expects appreciation to reach just 2.8% the lowest gain since 1992 and lower than the expected inflation rate. The impact is broader and deeper than many observers expected. Prices are falling fastest where the boom has been most extreme, on the coasts and in sunny destinations like Las Vegas and Florida. But outside the housing-hype spotlight, cities like Reno; Warwick, R.I.; and even Boise, Idaho, have experienced their own booms and now their own fizzling downturns.

There's no shortage of reasons for the stall. For starters, the average rate on a 30-year fixed mortgage was 6.45% in September, up from a low of 5.28% in June 2003. That increase translates into a 13.5% jump in the size of a mortgage payment, pushing homes out of reach for some buyers. Homes in some markets have become so expensive relative to wages that the pool of buyers has shrunk. In Los Angeles, for example, only 19% of residents earn enough to afford a median-priced house; nationwide, that figure is 60%. And over the past 12 months, many real estate investors have pulled out of the same markets they helped inflate, leaving behind a massive glut of homes for sale. "When you read in the newspaper week after week that you can get $60,000 off a home, $100,000 off, no reasonable offer refused, buyers are going to be wary," says Bob Toll, CEO of home builder Toll Brothers.

It all adds up to promising times for bargain-hunting buyers, bulk purchases of Maalox for would-be sellers, and plenty of anxiety about where prices are headed. While no one knows for sure what will happen next, there are resources that can help you discern which way the market in your hometown is leaning and we've got one of the best of them. For the fifth year in a row, we've worked with Ingo Winzer, president of Local Market Monitor, to come up with valuations for 152 markets. Drawing on more than 15 years of data, Winzer measures home-sale prices against local incomes to help determine whether a given market is overvalued, undervalued or fairly valued.

The most recent boom now looks most like a bubble in markets that have shown up year after year as the most overvalued especially in Florida and California, which account for 24 of the top 25 overvalued spots in this year's survey. Now those markets may be falling back to earth. According to Winzer, any market that's more than 30% overvalued is due for a correction. In 2003 only eight markets fit that description; this year 37 do. The more overvalued the market, the more inevitable the correction. Naples, Fla., for example, climbed Icarus-like to the top of our list based on second-quarter data, and some agents say they are beginning to see homes selling for 20% below what they would have fetched a year ago.

Every market is different, of course and a price correction can offer as much opportunity as heartbreak. To help you get a handle on your hometown, we've interviewed builders and brokers to find out what forces will shape the market. We've found tools to help you ferret out where prices are headed. And we'll help you figure out how to get the best deal on a home sale, no matter which side of the transaction you're on.

IN HIS OLD HOMETOWN

of Newport Beach, Calif., Gus Ramirez couldn't afford to buy a place to live a typical single-family home there costs around $1.8 million. But when he moved to Miami this summer, Ramirez found a market in steady decline and plenty of opportunities. So when a five-bedroom home struck his fancy, he didn't pounce. He waited as the asking price dropped from $550,000 to $499,000. Upon learning that the owner needed to relocate, Ramirez offered $490,000 and was accepted. Then he discovered that the home was 180 square feet smaller than advertised and cajoled the owner into coming down another $6,000. After a commission rebate from the online agency BuySide Realty, Ramirez paid only $475,000. Buying in a falling market made him nervous, admits Ramirez, "but I paid a 2004 price for this house."

In many cities buyers are back in control, but with the market moving so fast, it's still easy to overpay. A savvy real estate agent can help you craft a bid low enough to save you money, but realistic enough to be accepted. For example, when one of Frank Borges LLosa's clients finds an appealing home, the Northern Virginia broker searches the history of the listing agent data that's not available to consumers on the local multiple listing service. If the agent frequently sells below the asking price, LLosa knows he can be aggressive. MLS archives can also help buyers figure out the right bidding range. Data on completed sales, which have already closed, is publicly available, but it can be several months old and so might entice you to bid too high. Ask your agent to comb the MLS for "pending sales," deals that are in contract but haven't yet closed, to get a more up-to-date sense of the market.

Buyers' power is also showing up in the over-the-top perks that desperate sellers are offering. The freebies make for great publicity: Caribbean cruises, a year's worth of mortgage payments, even free cars. You're most likely to see such offers from home builders, who prefer not to lower their prices. But a seller's perks don't always add up to the best deal. After all, getting $25,000 knocked off the purchase price could be better than getting a free trip or flat-panel TV, once you account for the costs of carrying a bigger mortgage. If a builder's new property looks good to you, it's worth searching for similar homes even in the same development that are already on the resale market. Unlike builders, individual owners are usually willing to negotiate on price, says Diane Cohn, a Realtor with Chase International in Reno.

In an ideal world, you wouldn't sell a house at all while prices were falling. But if you must, experts agree it's best to do it quickly, before prices slide further. At any given time, a seller's agent might have 30 similar homes to choose from, says Warwick, R.I., Realtor Ron Phipps; you want yours to be one of the 10 that actually gets shown. In a booming market, you'd be tempted to tart up the domicile with granite countertops and whirlpool tubs; in a slowing market, it's not worth the trouble. Sellers have to grit their teeth and offer the best price to get potential buyers in the door.

Here again, getting your agent to tap pending-sales data can pay off. Pay attention to the pricing per square foot for homes similar to yours, and make sure your asking price is at the bottom of, or even below, that range. South Florida real estate broker Mike Morgan recommends that his clients take 1% to 3% off the price every week until they get an offer. Another way to motivate a potential buyer: Motivate his broker. In a typical home sale, a sales commission of 6% is split evenly between the buyer's and seller's agents. But you can ask that a higher percentage go to the buyer's agent, or even offer extra money for her out of your own pocket, so that she'll steer more customers your way.

JUST AS THE HOUSING

boom did not affect every town, not every market is due for a shakeout. How can you tell a market about to fall from one that's likely to do fine? Winzer's figures offer one clue: price momentum. It's rare for overall prices to fall from quarter to quarter, Winzer says, but when they do, it's often a sign of looming trouble. In Reno, for example, real prices dropped 1% between the first and second quarters of this year. Longer-term trends in prices can also foretell a slowdown.

You can also take the temperature of a market by tracking changes in home inventories the number of homes for sale on a market. Fast-growing inventories can signal a slowdown long before prices change. In Warwick, R.I., for example, the number of homes for sale has almost doubled, to 7,000, in the past 14 months; Realtor Phipps says it's now a buyer's market, in which homes routinely sell for 3 to 6% below their asking price. Rising inventories can also signify row after row of homes under construction. During the boom home builders overbuilt, catering to demand from investors. When prices began to plateau, investors backed out, leaving those markets with more homes than locals were willing to buy.

High real estate prices can also be their own undoing. In many markets where prices soared, homebuyers turned to option-payment adjustable-rate mortgages. Those loans allow borrowers to make very low initial payments so they can afford a more expensive home. Thirty percent or more of the loans written in the first quarter of 2006 in the most overvalued markets, including San Diego, San Francisco and Salinas in California, were option ARMs. The problem: After, say, five years, payments on those loans increase dramatically, sometimes rising beyond what owners can afford. And because the low initial payments don't build equity, some borrowers find themselves owing more than the home is worth, meaning they can't refinance into cheaper loans. "People will default in droves," predicts Ken Heebner, real estate fund manager at CGM Funds, who says markets including Miami, Los Angeles and the San Francisco Bay Area could see prices tumble by as much as 50%. In other words, time to stock up on bottled water and Spam and hunker down.

Not every market is Miami, and not all forecasters are pessimistic. David Lereah, chief economist of the National Association of Realtors, expects that nationwide prices will briefly fall below their 2005 levels but then bounce back in 2007. He adds that about one-third of the country is doing just fine primed for growth rather than a slowdown. You can find many of these markets on Winzer's fairly valued list, and they usually benefit in varying degrees from three key factors: a growing economy, popularity with retirees and plenty of room for new construction.

In El Paso, Tex., a growing military base and increased business connected to nearby manufacturing in Mexico have created a thriving job base. Home prices there jumped by 16% in the first quarter, but they're still in line with local incomes. In Raleigh, N.C., an abundance of cheap land has helped keep home prices growing at a stable 3% to 5% a year. An influx of retirees has buoyed the market in Salt Lake City, where the amount of time it took to sell a home recently fell to 29 days from 51 days in 2005. And Albuquerque, N.M., has all three key growth factors working in its favor. But as Patrick Montrose, an associate broker with Caldwell Banker Legacy, points out, "You can still get a decent house for $200,000."

True enough, inexpensive real estate in Albuquerque doesn't help you if you really need to live in San Jose. But housing-market turmoil underscores the point that for many of us, it doesn't make sense to obsess over our homes' value the way we'd obsess over, say, our Google shares. Even economists like Yale's Robert Shiller, a notorious bear on housing as an investment, acknowledge the upsides of owning a house. Owners get the mortgage tax deduction, and in return for the cost of shelter, they get equity in an asset. And most economists think that today's rocky markets will be short-lived. "What drives the housing market is demographics, and the demographics look pretty good," says Patrick Newport, an economist with Global Insight. "The 10-year outlook for housing is actually robust."