This article is from the Aerobics Fitness FAQ, by email@example.com (Robles) with numerous contributions by others.
Weighing in water (hydrostatic) is generally considered
the best method. But, the real answer is that a single
measurement, no matter how accurate, doesn't tell you much.
What's really important is, are you gaining or losing fat?
The best way to answer this question is to take a reading
every few weeks and graph the results. The absolute
accuracy of these readings isn't really important as long as
you use consistent technique so that the error is about the
same every time. The two methods that work best for
at-home measurements are skin-fold calipers and biceps IR
units. Treat the numbers not as "body fat percentage" but
as a "body fat index." It is a general method of tracking your
aerobic fitness. In general, aerobic fitness or aerobic
capacity increases with decreased levels of bodyfat. It's like
the gas gauge in your car - it doesn't tell you how many gallons
you have, but it gives you a relative indication.