William Jordan, president of the Sentinel Group, a financial planning firm in Laguna Hills, Calif., has always told his clients that they should own at least one rental property. Jordan "loves real estate as an asset class," he says.

But a few years ago, Jordan sent a letter to his clients explaining "why real estate will crash." Practicing what he preached, Jordan sold not only his own investment property, but also his home and moved into a rental, where he still lives. "I might have been a little early on my call, but the clients who took my advice are glad they did," Jordan says.

Of course, there's been no escaping the disastrous aftermath of the real estate collapse. By the middle of October 2008, one in six homeowners owed more on their mortgages than their houses were worth. As rising interest rates forced overextended subprime borrowers to default on their adjustable-rate mortgages, investment banks left holding these mortgage-backed securities had nowhere to turn. The contagion quickly spread to the U.S. markets and then internationally, as big-name mortgage lenders, insurance companies, investment banks and retail banks either went bankrupt or were bought out (fully or in part) by the government. Central banks around the world worked feverishly to restore confidence in the global markets.

And now? Is Jordan ready to rejoin the rolls of property owners? Not yet. "I'm still bearish," he says. "Originally, I had set 2009 as a target for getting back into real estate, but now I think it might take longer for the market to stabilize."

My own informal telephone poll suggests that advisors widely share Jordan's real estate outlook. This is a better time to buy property than 2005 or 2006, but there's no hurry. With credit tight and markets swinging wildly, now is a scary time to commit large chunks of capital to what is still a relatively illiquid sector. Good deals—perhaps great ones—may lie in the future.

On the other hand, investors who prefer a passive approach to direct property ownership might have some real opportunities today. Brad Case, vice president for industry research and information at the National Association of Real Estate Investment Trusts (NAREIT), says that, judgin—g by lessons learned from the last two REIT routs, this might be a good time to invest in REITs.

Real estate, of course, is a huge and diverse asset class, offering various types of properties and multiple ways to invest in them. The current investment outlook may differ, depending on where you're looking.

Looking for the Bottom

For clients who want to own property directly, the most common tactic is to buy a single-family home and rent it to tenants. That slice of the real estate market enjoyed the biggest boom in the early years of this century and has suffered the sharpest bust. Before Jordan will advise clients to invest in this type of real estate again, he wants to detect signs of hitting the bottom. "I'd like to see the amount of foreclosures level off or fall," he says. "I'd like to see prices stabilize, too."

Such buy signals have yet to appear. RealtyTrac's August 2008 U.S. Foreclosure Market Report shows that foreclosure filings—default notices, auction sale notices and bank repossessions—were up 27% from August 2007. In August 2008, the total number of U.S. properties that received foreclosure filings and the national foreclosure rate were both the highest seen in any month since the company began issuing reports in January 2005.

As foreclosures rise, home prices keep falling. The National Association of Realtors reported that the median existing single-family home price dropped 7.6% in the second quarter of 2008 compared with the same quarter of 2007, falling from $223,500 to $206,500. The Shiller-Case index of 20 large cities showed price declines of 16.3% in the year ended July 2008.

Another key indicator—the number of unsold homes on the market—is also discouraging. According to Larry Swedroe, principal and director of research at Buckingham Asset Management in St. Louis, a five-month inventory of homes for sale might indicate a stable market. Right now, at the current sales pace it will take 11 months to clear the market of available homes.

From all indications, then, the market for single-family homes is still weakening rather than stabilizing. "Many investors are afraid of missing the bottom in real estate," Jordan says. "In truth, you don't have to pick the absolute bottom in order to make money. Judging from past cycles, investors will have a window of anywhere from three to seven years to make profitable investments."