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It is a fact that the real estate industry has historically been a leading indicator of the American economy. When it falls, Wall Street falls. When home prices rise, so does the Street. If that continues to be the case, the American economy is on the rebound.

For proof, look at yesterday’s new-home sales figures released by the Commerce Department. Compared to sales in August, the amount of new homes that sold in September rose by an unexpectedly high figure of 2.7%.

Over 464,000 freshly built houses traded hands across the country. Three years ago, that number was nearly three times higher. But that is all in the past. What matters is that this month’s figure marked an end to the real-estate landslide.

So what has caused buyers to return to the markets? Two things, falling prices and fear of the stock market.

As for falling prices, take a look at these figures. One year ago, the average new home sold for $240,300.  Right now, that figure is just $218,400.  Buyers smart enough to realize home prices are not going to drop any further are getting an instant 10% discount on their homes.

Next, there are plenty of folks unwilling to take a leap into the stock market right now. With the nation facing a deep recession, the equities market is a scary beast for the uninitiated. They figure if they invest in real estate, their investment will always hold at least some value. After all, a piece of land cannot go bankrupt and disappear overnight. Smart idea. Instead of burying their money in their backyard, they are making it work for them.

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Even with the strong selling last month, inventory levels are still near record-high territory. Over 390,000 new homes remain unsold across the country. According to the experts that calculate such things, that is a 10.4-month supply. Inventories dropped by over 7%.

With prices falling and such a high inventory of homes still on the market, few builders are willing to raise a new house unless it is already sold. That simply means the market is correcting itself and the free economy is working.

As long as the government stays out of the industry, it should recover in short order.

So where is the investment potential? It depends on how much you have to invest.

If you have plenty of cash and have access to the markets along the western coast, buy all the deeply discounted properties you can afford. Rent them now and sell them in a few years. Your investment will pay off handsomely.

If you don’t have a few hundred thousand dollars lying around, you can reap equally large gains by investing in a few choice real estate investment trusts (REITs). Trusts like Post Properties (NYSE:PPS), which is involved in apartment rentals and condo sales, and American Campus Associates (NYSE:ACC), which is taking advantage of the shortage in student housing and a real-estate industry bottom, will do well. And just as almost all REITs do, they both pay nice dividends of 9.7% and 5.5%, respectively.

The facts are obvious. The real estate market is turning around, proving the American economy will be on the rebound fairly soon. We have seen the worst of this crisis.

Now is the time to re-allocate your portfolio and ensure you are properly positioned to take advantage of the bull that lies just over the horizon.

Disclosure: none

Source: REITs: Last Chance for Deep Discounts?