I was listening to NPR's Marketplace this morning only to be assaulted by a stunning statistic -- Bill Gross, the manager of the largest bond fund, $102 billion Pimco Total Return Fund, thinks that housing prices could fall 20%. Is Gross right? If so, what should you do?

Gross's assumption is that 2003 was the last time home prices were 'normal' -- based on lower interest rates and demographics. He believes that since then, prices have jumped above that normal value and will therefore drop 20% in order to get back to where they belong. (This is not just idle speculation: home prices in Irvine, CA have already sunk 17% since June.) Gross believes that despite the Fed's talk of inflation vigilance, such a drop in housing prices will lead the Fed to cut interest rates from 5.25% to 4% to cushion the economic pain.

I think Gross may be right. As I've noted here, inflation continues to be a problem. But the Fed seems to be counting on an economic slowdown to solve the problem. And if housing prices do fall 20%, the economic impact may cause the Fed's fear of deflation to exceed its fear of inflation -- due to excess productive capacity in the U.S. economy.

What you should do depends on your situation. If you were thinking of buying a house, wait two years so you can buy after prices have tumbled and sellers are more desperate. If you must sell, cut your price and get out immediately. If you can wait to sell -- I would suggest holding for at least a decade which is how long I think it will take for things to return to normal.

I think 2007 is the year when home owners will be jolted into the realization that trees do not grow to the sky and prices can indeed drop. What do you think?

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter.