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"If you have a variable rate mortgage, now is the time to refinance and lock in a fixed rate to protect yourself in the long run," said Gary Ambrose, a director at Personal Capital, Inc., a unit of National Financial Partners, recommending that homeowners lock in a rate for at least 25 years.

Such a move may hurt in the short term, since it will likely result in a higher payment now, but it can protect you from crushing payments in the future as rates rise unpredictably.

"The affordability issue becomes very real when mortgage rates rise because a lot of people have taken out interest only loans or adjustable rate mortgages thinking that rates would stay low," said Brian McQuade, with Columbia Financial Advisors.

Just how many people have taken out interest only loans? According to SMR Research Corp, more that 25 percent of loans were interest only in the first half of 2005, up from 15 percent for all of 2004.

And while there is still debate over whether the central bank will put the brakes on its monetary tightening campaign, many economists and bond traders see three more quarter-point rate increases by the middle of next year. They also say that long-bond yields and mortgage rates will rise when they capitulate to rising overnight lending rates.

Maybe you've been thinking about a smaller house now that the kids are gone. Or you've fixed up the investment property and have been contemplating a sale.

"Prices are high now, and at the very least price appreciation is going to slow down," he said. And after you downsize, you not only reap home equity gains. You're likely to save on property taxes, utility bills, insurance and other upkeep costs.

Several financial planners said it would be smart to use the cash your real estate has created to diversify into more traditional investments.

"We're going to see a lot of the money that has been parked in real estate move back to stocks," said McQuade. "Wealth should not be centered in your residential real estate, which is going to return to more stable to flat appreciation."

The exception: if your home is on one of the coasts, where real estate values tend to stay buoyant because it is generally considered desirable to live or rent by the sea.

So get the real estate portion of your portfolio in order. If it comprises the bulk of your investments, it's time to look into other ways to make your money grow.

Now may also be the time to rebuild your household savings, given that the savings rate in the U.S. is at less than 1 percent, the lowest since the Commerce Department started tracking it in 1947.

"People have to minimize the use of home equity for short term financial needs," said Ambrose. "Get your budget in order. Home equity lines of credit are for long-term financial needs. They were not meant to buy cars and trips and fuel overspending."

In 2005, the average American had made about $20,000 in home equity gains from price appreciation alone, according to the National Association of Realtors. But NAR senior economist Lawrence Yun says that rate of appreciation is due to slow.

"We've been in a period when a lot of equity has been dropped in our laps, and it has been fairly easy to get to that equity in tax favorable ways. In these circumstances, savings will fall given the strong consumer attitude in America," said David Seiders, chief economist with the National Association of Homebuilders.

Steve Bohlin, managing director at Thornburg Investment Management, compared the abuse of home equity to the wealth effect of the late 1990s. "People are spending more than they normally would on an asset that can fluctuate in value."

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The king of real estate's cashing out

Shawn Tully, Fortune Senior Writer

NEW YORK (FORTUNE) - Tom barrack, arguably the world's greatest real estate investor, is methodically selling off his U.S. real estate holdings as prices drive the market to nosebleed levels.

He likens the current real estate market to a game of polo.

" I feel totally safe playing polo on a field full of pros," says the bronzed 58-year old. "But when amateurs are all over the field, someone can get killed. They have more guts than brains. They charge after every ball and don't know when to hold back."

It's the same with U.S. real estate right now. "There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them.

Says Barrack: "That's why I'm getting out."

Investors take heed. Barrack may be an amateur at polo, but when it comes to judging markets, he's the ultimate pro.

Arguably the best real estate investor on the planet, he runs a $25 billion portfolio of trophy assets, from the Raffles hotel chain in Asia to the Aga Khan's former resort in Sardinia to Resorts International, the largest private gaming company in the U.S.

Barrack's Colony Capital, one of the largest private equity firms devoted solely to real estate, has racked up returns of 21 percent annually since 1990, handing investors, chiefly pension funds and college endowments, 17 percent after all fees.

Barrack bought the Fukuoka Dome, Japan's Yankee Stadium, in part because he calculated that the titanium in the retractable roof was worth as much as the purchase price.

His strategy is to buy classy but neglected properties anywhere in the world where prices are low. Then, he'll pour in capital to fix them up, and resell them in five years or so with their pedigrees fully restored. Says his friend Donald Trump: "Tom has an amazing vision of the future, an ability to see what's going to happen that no one else can match."

Right now, Barrack's view of the U.S. market couldn't be clearer: It's a great time to sell, and a terrible time to buy.

In fact, he sees signs of tech bubble mentality in real estate. Too much capital is chasing real estate, he explains, with hedge funds, private equity groups, and rich investors all bidding on the same properties. "They've driven prices to the point where the yields on high-quality properties are like the returns on bonds, around 5 percent or 6 percent," says Barrack. "That's too low."

And he sees the bubble deflating soon. Barrack thinks the catalyst will be a trend few others are talking about, a steep rise in the price of building materials and labor. "Construction costs have spiked 20 percent in the past nine months," he says. The reasons: Shortages of labor and materials like lumber because of the building boom, and increases in the price of oil, needed to produce everything from plastic piping to insulation to shingles.

The slump will show up first in speculative hot spots like Miami and Las Vegas, he says, where condo developers are preselling their projects for what looks like big profits. When they actually build the units over the next year or two, he predicts, they will end up spending more than the units are now selling for.

At that point, says Barrack, the developers will try to raise prices. "But most of these buyers are speculators," he says. "They will either sue the developers to get the original price or take their deposits back and walk away." The developers will then put the units back on the market, and the glut of vacant condos will drive prices down. "It's the busted deals caused by construction costs that will cause the turn in the market," he says.

So Barrack is buying just one type of property in the U.S.: Casinos. And in contrast to most gaming titans, he's doing it on the cheap.

Colony paid just $280 million for the 3000 room Las Vegas Hilton in 2003, one-tenth of what Steve Wynn paid to build his new casino, which has roughly the same number of rooms.

The reason Barrack likes casinos is that he's licensed to operate casinos in all the major markets, while most private equity firms and other financial players don't have licenses. Hence, they're locked out of the market, and can't bid against Barrack. For Barrack, casinos are safe, exclusive preserve, far from frenzied melee that makes every other part of the U.S. real estate such a dangerous place to play.

For now, Barrack is getting off the field. But when the din subsides, and the amateurs depart, look for Barrack to ride back in, mallet cocked, ready to play again.