Dear Mr. Berko:

In April, my brokerage firm issued a report on the housing market and strongly recommended that I buy D.R. Horton Inc. So I bought 700 shares at $34.25. The stock is now $28.12, and I asked my broker what I should do. His firm still has a buy recommendation on the stock, and he told me that his research department recommends that I buy 700 more shares at this lower price. Please advise me if you think this is a good move.  S.O., Aurora, Ill.

Dear S.O.:

I would no more trust a fox on a poultry farm than I would the research at your brokerage firm. Research at huge member firms is often influenced by their current and potential investment banking clients. So if your brokerage has several home builders as investment banking clients, you can bet baby’s booties that your brokerage will not publish a negative opinion, no matter how bleak the industry outlook. It’s bad for their profitable but competitive investment banking business, while retail accounts like yours are a buck a peck.

This practice was supposed to have stopped a couple of years ago, but because your brokerage pays the New York Stock Exchange such huge bucks in annual fees, the Big Board and John Thain, its chief executive officer, turn a blind eye to enforcement.

You can bet the house that home values will continue to fall, and your brokerage’s sunny consensus on the housing market is an appalling sham. Home prices still have enormous room to decline, and the biggest losers to come are cities in South Florida, Phoenix, Las Vegas and numerous California communities such as Los Angeles and San Diego.

As of this writing, single-family home sales are down 15 percent, single-family housing starts are down 35 percent, single-family home prices are down 3.5 percent and unsold inventory is up 34 percent to 43 percent, depending on whom you talk to. But the important question is, “How long will it be before the stock market is unable to shrug off this news as well as more to come?” And my important answer: “Any time between now and 10 months from now.”

The typical American home buyer can’t afford today’s prices. At $250,000 for the average house – and a 6.5 percent mortgage – a new homeowner pays $2,700 a month to cover principal, interest, insurance, taxes, utilities and maintenance. That’s $32,000 a year, and the average head of household earns $40,000 after taxes. God help him and the housing industry if this fellow and tens of thousands of others like him are laid off.

About 50 percent of those new mortgages are interest-only loans, which will convert to principal-and-interest in 2008, and that spells trouble. According to Gary Gordon of Annaly Mortgage Management Inc., a housing-induced economic downturn (unless Federal Reserve policy-makers drastically reduce short-term rates) is staring us in the face.

Certainly the pinstriped suits at Smith Barney, Merrill Lynch, Dean Witter, etc., know that delinquencies and foreclosures are festering in the subprime mortgage market. And certainly these lads know that “liar’s loans” (those with little or no documentation), which account for 62 percent of interest-only mortgages, are showing serious signs of stress and distress.

The housing market looks bleak, but neither Merrill, Smith nor Dean have a sell recommendation on Centex, Toll Bros., D.R. Horton, Lennar or Pulte, all of which predictably slumped in value (in a strong up market) between 30 percent and 40 percent last year.

I agree with James Grant, the highly esteemed editor of Grant’s Interest Rate Observer: “Short the housing stocks.” Grant is not in the investment banking business, and his vision is not clouded by conflicts of interest.