I certainly do hope you are working with a Buyers Agent and I am going to assume you are. I always tell my client's to be honest and upfront. Yes, you should tell the seller that they have competition and be honest why you are having a problem deciding. There must be some kind of difference between them but if you love both of them equally then...I would have your Agent run some comps...which will tell you what the other homes have sold for like the home you are interested in and find out the current market value and make an offer just a bit lower than that if you do not have any other on the table from other interested buyers. If it is all about price than you need to make sure the price you want the home for is reasonable with what the home is worth. It also depends on the current situation of the seller too. But, in most cases the seller will get reasonable market value for their home.
SO, My Vote is yes. Be Honest and Upfront. If the seller needs to sell and they know you are looking at the home down the street and they should know what home you are talking about if their seller agent is providing them with this information. Their negotiations may be effected knowing you are looking at a 2nd home and you have not decided that their home is the home of your dreams.
I hope this helps you.