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Everywhere you go in Madrid, For Sale signs on half built apartment blocks dominate the Spanish capital. No surprise: The global recession has hit the country’s once booming real estate market harder than most. Property prices from Barcelona to the Balearic Islands fell 6.5% in the first quarter of 2009 alone. They are expected to drop 35% or more from their 2007 peak by the end of this year.

The economic downturn in Spain and dozens of other countries has left many homeowners struggling to keep up with their mortgage payments. But for well funded property buyers, the recession is opening up a bonanza of cut price deals. When times were good, cheap credit fueled almost insatiable demand for second homes and investment properties. Now, financing is harder to come by, and developers are slashing prices to offload stock built for a dwindling number of buyers.

The power shift in property sales is gradually enticing investors back into the market. From European hot spots in Croatia and Montenegro to less exotic investments in Florida and the Southwest U.S., now may be the right time to buy. Double digit price declines since 2007 and the renewed strength of the dollar against foreign currencies make buying overseas more affordable for Americans. And emerging countries, especially Brazil and India, carry the prospect of continued economic growth despite the downturn while offering properties costing as little as one eighth the price of the average U.S. home.

Bullish on Montenegro

“Where people can get a good deal, they’re grabbing the bargains,” says Charles Weston Baker, head of international residential investment at realtor Savills in London, which saw a 10% to 20% jump in sales in April compared with the month before. “Price falls are putting property back within the grasp of investors.”

Needless to say, buying when the property market is low can pay big dividends over the long term. But investors still face uncertain immediate prospects. Stimulus packages worldwide have begun to reignite lending, but banks continue to charge premium interest rates and demand hefty down payments that could shut out some bargain hunters. Analysts also caution that real estate may depreciate well into 2010, leaving investors facing declining property values until the global economy rebounds.

To limit downside risks, market watchers suggest hunting out properties in countries with the best long-term economic growth prospects, such as Turkey or India. They also advise wherever possible that buyers obtain financing from multinational banks to reduce the chance that domestic financial problems could affect the loan. For investment properties, locations offering the prospect of steady rental income from tourists are less risky than those relying on local tenants.

Which markets worldwide are worth considering? Adam Challis, associate director at CB Richard Ellis (CBG) in London, is bullish on Montenegro, just north of Albania on the east side of the Adriatic Sea. With its pristine coastline and growing business ties to the European Union and Russia, Montenegro has enjoyed 28% compound annual growth in tourism since 2001 and 20% annual growth in real estate prices since 2005. Until the global downturn began to be felt in 2008, buyers were pouring nearly $600 million per year into the domestic property market. “Montenegro is fast establishing itself as a high end [tourist] destination,” Challis says.

Researchers at realtor Jones Lang LaSalle (JLL) also recommend Eastern Europe, but say some Western European markets should pique investor interest as well. Falk Schollenberger, the company’s head of residential investment in Germany, reckons domestic real estate, particularly around Berlin, Munich, and Frankfurt, offers low risk returns in a market that hasn’t suffered the double digit price declines recorded in European countries such as Spain and Ireland.

To cut their balance sheet risk, many German banks have begun to sell off their property portfolios, often marking down assets by up to 50%. “Forced sales are likely to become more common,” says Schollenberger. “There will be further negative pressure on house prices, which will present investors with potential bargains.”

If Europe doesn’t sound appealing, the Middle East and Asia could offer bargains for investors willing to take on more risk. At the top of many lists is battered Dubai. Analysts at UBS (UBS) reckon property prices in the United Arab Emirates’ largest city have fallen 25% since early 2008 and could drop 70% more by the end of this year. That provides an opportunity for investors to snatch cheap deals at luxury resorts, which developers are looking to offload to service large debt burdens.

To be sure, any investment before the global economy mounts a sustained turnaround carries risk and even more so when it involves real estate, which was the primary catalyst for the current global economic mess. But for buyers with strong stomachs and access to capital, this may be the best time in decades to load up on property.

Slightly better news from the housing sector, strong results from drugmaker Merck and speculation over what an economic stimulus plan will look like all helped to push stocks higher Tuesday.

The Dow Jones industrial average snapped a three day losing streak to gain 141.53 points, or 1.8%, to 8078.36. Despite the day’s gain, though, the Dow remains down 8.0% this year.

Lifted by gains of stocks in the motorcycle manufacturing, home building and personal products industries, the Standard & Poor’s 500 index rose 13.07 points, or 1.6%, to 838.51. The S&P 500 is down 7.2% in 2009.

Tech stocks also participated in the day’s bounce, with the Nasdaq composite index rising 21.87 points, or 1.5%, to 1516.30. The Nasdaq is down 3.9% this year, the least amount among the major stock market indexes.

The market’s ups and downs make investors just as worried to sell and miss out as they are to hold on and stand to lose more. “Investors are getting more gut checks than with the worst jar of peanut butter,” says David Sowerby of Loomis Sayles.

There was at least some news for the bulls to hang onto. Pending sales of existing homes rose 6.3% in December, giving a boost to the struggling home building industry group.

Meanwhile, an alternative plan being discussed in Washington to stimulate the economy, in the form of deep tax cuts, also gave traders “some optimism,” says Todd Clark of Nollenberger Capital.

Still, investors aren’t convinced the economy is healing just yet and market ups are to be expected after bouts of selling, says Richard Cripps of Stifel Nicolaus. Trading volume, or the level of buying and selling, remains light, indicating major players are still on the sidelines, he says.

“The market is still in wait and see mode,” Cripps says.

Highlights: Home builders rallied. KB Home rose $1.18 to $12.28, Toll Bros. gained $1.08 to $18.06, and Pulte Homes added 68 cents to $10.92 on the news of better pending home sales.

*Merck gained $1.81 to $30.24 after the drugmaker said it earned $1.6 billion, or 78 cents a share, during the quarter. That reversed a loss in the same quarter a year ago and topped estimates by 18%.

*Citigroup fell 19 cents, or 5.2%, to $3.46 on continuing uncertainly about what form a stimulus and banking rescue plan will take.

More repeat buyers appear to be buying homes, contributing to a slight uptick in existing home sales this spring. First time buyers’ share of existing home sales in April declined to 40% from over half in March, according to the National Association of Realtors. The majority of buyers are now repeat buyers, which includes owner occupants who are moving up to larger or more expensive homes. Investors make up the rest of the market.

Sales of existing homes last month rose 2.9% to a seasonally adjusted annual rate of 4.68 million units from 4.55 million in March, the NAR reported Wednesday. Still, that was 3.5% below April 2008 levels. Home sales are rising in areas that have had a large number of foreclosures, such as California, Nevada and Florida.

Activity from repeat buyers is important for increasing sales of midprice homes and for clearing out inventory of unsold homes. At the end of April there were 3.97 million existing homes for sale, a 10.2 month supply at the current sales pace, compared with a 9.6 month supply in March. Economists say a six month supply is healthy.

“During the spring season we see existing home owners put their homes on the market,” says Lawrence Yun, chief economist at NAR. “First time buyers are releasing the existing home owners, who are then able to sell to make their purchases. It’s a chain reaction.”

But the market may not yet be drawing large numbers of repeat buyers who are trading up to larger or more expensive homes.

“The move up buyers aren’t there. People are sitting on the sidelines trying to judge the market,” says Coldwell Banker CEO Jim Gillespie. “I believe it’s more investors.”

Some economists say that even with more repeat buyers and a tax credit for first time home buyers, the housing market’s recovery is still faltering because of the economy and job losses.

“Sales will continue to drop in the second half of the year, because the economy is losing so many jobs and the GDP (gross domestic product) is still dropping,” says Patrick Newport at IHS Global Insight.

The national median price for existing homes was $170,200 in April, 15.4% below 2008.

Sales of foreclosed properties and others that sold for less than their mortgage balance continue to pull down the median price because they generally sell at discounts. They represented 45% of all existing home sales in April.