By John Campbell

Speculation is rampant that the so-called “housing bubble” has popped. Despite the dot-com bust in the ’90s, severe trade deficits, a falling dollar, 9/11 and the costly War on Terror, the prices of homes and real estate increased at unheard of levels in the first half of this decade.

The explosion in real estate prices created the ideal conditions for a financial bubble. To stimulate buying as prices rose beyond what many consumers were willing or able to pay for housing, lenders have offered many creative mortgage options to generate sales. Adjustable rate mortgages (ARMs), interest only mortgages, 1 or 2 percent mortgages and option ARMs are some of the most common alternatives to traditional 15-year or 30-year fixed rate mortgages offered today. As first time homeowners, speculators, and investors flocked to get these non-traditional mortgage loans, home prices have continued to surge. The only problem is that, with the economy lagging, interest rates will likely reset at higher rates than many consumers are prepared to pay.

As more and more homeowners realize they can’t afford to make their new payments they often end up with two choices - sell the home immediately or risk foreclosure. With a lot more real estate on the market at unrealistically inflated prices, sellers may have no choice but to dump their homes at bargain prices. Even with a wider availability of homes at lower prices, stagnating wages and skyrocketing gas prices are causing many potential homeowners to take a pause. Seeing ARM rates skyrocket for many consumers may also scare off a lot of potential buyers from purchasing a larger home than they can realistically afford. Thus, the housing bubble may be popping.

All is not doom-and-gloom in regards to housing. For the savvy buyer, a popping housing bubble can create new opportunities. With prices going down, consumers looking to settle down in a new home for no less than 5 - 10 years may do very well. Even if housing prices continue to fall after you purchase a new home, if you plan to live in the home for the long term you may be able to ride out any lowering of prices.

Housing markets are unpredictable. Prices could potentially go down for several years before an economic recovery. As history has shown, prices will eventually stabilize and homeowners will be able to build equity in their homes once again. Unfortunately, now may not be the time that homeowners will build a lot of equity in their homes. At the very least, housing may not make as lucrative of a short-term investment as it once was. How far prices could actually be lowered still remains to be seen.

Given the current state of the housing market, you would be wise to stick with a traditional 15- or 30-year mortgage if you can afford it. In the short term, your payments will be higher than those of an ARM, interest only or 1 or 2 percent mortgage. Lower monthly payments may seem very enticing but you really need to know what you’re getting into with these alternative mortgage loans. Get in over your head and your home may cost you a lot more money in the long run if you can even afford to stay in your home once the interest rates inevitably increase.

With a traditional 15- or 30-year fixed rate mortgage you’ll have peace-of-mind knowing that your interest rate won’t increase. You’ll also build a lot more equity in your home. When you’re finally ready to sell, you’ll be happy to have all the equity you can get. Do a lot of research, buy the home that’s right for your financial situation and get a mortgage that fits your long-term needs and you should be able to ride out any potential popping of the housing bubble.

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John Campbell is the writer and editor of CashBuzz, A financial portal for the rest of us. Check out cashbuzz.com for the latest articles on money management and tips and tricks that can help improve your finances. This article may be reprinted on your Web site if the copyright, author information and active link are included.