I don't believe I've previously provided a link (in this space), but I've been negative on housing for a number of years (before the widely accepted realization of the Housing bubble). But I do casually follow that blog and I agree that American housing prices are more or less fairly valued (or approaching that) on average at the current time, so I thought I'd time stamp that here. Basically rental costs and ownership cost should never be that disparate, and those situations should create pricing arbitrage. Home ownership is not an investment (development notwithstanding), but excellent debt (you have to live somewhere) and it's a tax break for home owners/the wealthy. With current interest rates significantly below my expected rate of inflation (making real interest rates negative if your income grows year over year by market adjustment). If you can bear the burden, now would actually be the time to saddle up with some intelligently acquired debt (no more than 20 to 30% of your income) if you managed to avoid it this long.
In my opinion 10 to 25% of your portfolio should contain real estate ownership once you reach a certain threshold of wealth. Whether you should own real estate for the explicit purpose of renting or developing or use the commodified Real-Estate Investment Trusts depends very much on your personal standings. I don't have any particular suggestions for REITs beyond what I'd say for mutual funds & ETFs: Watch the expense ratios so TIAA-Creff, Fidelity, and Vanguard are likely the only places you should be looking. 5 grand is a much more reasonable initial investment than a few million, plus everything is managed for you from the getgo. But it does lack a certain tangibility that is entirely reasonable to demand in questionable financial times.
If you're interested in finding rational prices in houses consider the formulaic approach for commercial properties which removes foolish things like emotion from the situation (not to say sentiment can't tweak the numbers later). As I recall you check public records for sale prices and divide that by the annual rental rate of the property in question to get your Gross Rent Multiplier then go back to the property you're interested in, find it's current rental rate and multiply it by your multiplier (easy) to figure out a base. Other considerations for ownership include the total cost of ownership and if you're going to be renting the property the return you'll be getting minus those expenses (Net income). It starts to get a little more complicated if you'll be financing the purchase (and at these fixed rates wouldn't you?) and you start talking about "Cap rate" (Net income/Cost).
Clearly these are just factors to consider including what you would ordinarily consider (location, condition, access, growth rate) but those factors are included in spirit by the closing sale prices of similar properties so it's a good way to check your emotion. Depending on your background I might suggest the following as further reading:
Moderate: Capitalization rate for Commercial real estate investing
Advanced: US Commercial real estate value