Now that median home prices in the Tucson area have leveled off for a few months, we have a chance to pause and reflect on some of the attitudes created by the frenzy of the past several years.

The conventional wisdom of creating home equity is dead. A number of financial writers are proclaiming that home equity should not be left idle but should be invested in other assets. Mortgage brokers, happy to accommodate, are presenting projections with low-rate interest-only mortgages combined with second mortgages that show greater asset accumulation over time than paying down the mortgage balance. Even better, your entire payment is tax-deductible interest.

Unfortunately, this is a long-term strategy based on very short-term conditions. Interest-only mortgage rates adjust after an initial period, potentially leaving the homeowner with a huge increase in payments. And since there is no room for a decline in the price of the property in this strategy, it should only be used when there is a high degree of certainty that the property will be sold before the interest-only period ends.

The biggest flaw, though, is that most people aren’t disciplined enough to follow this strategy; they are more likely to spend the freed-up funds than reinvest them. Disciplined homeowners have always been able to leverage their home equity for other purposes even when using traditional mortgages.

The conventional practice of making additional payments to mortgage principal will still save huge amounts of interest. This decision should be based on other savings needs (retirement, education, emergency funds, etc.) and the potential returns of the alternative uses of the funds.

Buying a rental property or “flipping” property is not risky. The fundamental concept of a positive cash flow rental property has been abandoned by many investors, so both of these practices are predicated on a continuing increase in property values. New valuation methods have been embraced to justify values, such as comparing the “cost of owning” to rents or incomes. The cost of owning, of course, is overwhelmingly influenced by interest rates, but proponents of this approach assume that all buyers have locked in their rates. Recent mortgage data shows that over 25% of new mortgages are interest-only loans, which will ultimately subject borrowers to interest rate changes.

Flipping, or rapidly buying and selling, property has undeniably produced excellent returns for some investors. Should the market slow, flipping becomes a game of musical chairs, and as the stakes become higher and the temptation greater the competition will heat up, wringing these returns out of the market.

Likewise, rental properties can produce excellent long-term returns, especially if they produce positive cash flow (more income than expenses). Experienced rental investors know that you have to consider costs such as vacancies and maintenance, and they know that novice investors who are willing to accept negative cash flow are destined to overpay for properties.

The value of my house has doubled in four years, so that’s 25% annual growth. One of the advantages of real estate is the use of leverage, or borrowed money. This creates the opportunity for large returns on the “out-of-pocket” investment when there are short-term price spikes. But even over a period as short as four years, because the doubling reflects compounding, the annual increase is actually just under 19%.

The real danger lies in the unspoken implication that this kind of growth will continue. (You know danger is lurking when all the anecdotal experiences are home runs; you seldom hear of a losing real estate experience these days, and there are always losers in every market.) Extend the period out to ten years and most single-family homes in Tucson have increased in value less than the stock market, even with the market crash in 2000, and have essentially kept pace with the bond market. Over longer periods, housing values have roughly kept pace with inflation.

This is a good example of the “trees grow to the sky’ theory; extend recent price increases into the future, and the numbers become so large so fast it becomes obvious those increases can’t continue. Already prices have far exceeded their historical relationship to rents, and housing affordability based on local incomes is an issue in many markets.

But my house has still doubled in value. So what? Unlike assets which have a liquid, easily-traded market, houses are ultimately worth what they actually sell for, regardless of the price the neighbor’s house fetched. The “my house has doubled” assessment is usually based on the last neighborhood sale plus a premium because, after all, the market just keeps going up.

Even if you were to sell your house, what’s next? Trading houses in the same market doesn’t create any advantage, because the next house is subject to the same market forces that increased the value of the house you sold. Worse yet, there are substantial transaction costs with such a move and the temptation is to increase the debt load to purchase a more expensive house. As painful as it may be to acknowledge, all those Californians have the right idea by cashing out of an expensive market and either moving into a less expensive market or “trading down” in house value.

Real estate can be a great investment and can also serve to diversify a portfolio. You’ll be more successful and rest much easier by treating your primary residence, both financially and emotionally, as a home rather than an investment and by applying rigorous financial analysis to other real estate ventures.