Prospective homebuyers are certainly skittish. Sales of previously owned homes have dropped to their lowest level since January 2004. The inventory of unsold homes is a record high. It's no surprise -- interest rates continue to rise, and there are additional concerns over the economy. As a result, 2006 has been a rough year for homebuilder stocks such as Toll Brothers (NYSE:TOL), Pulte Homes (NYSE:PHM), and Centex (NYSE:CTX). All these former Wall Street darlings are hovering around their 52-week lows. Like Chicken Little said, the sky must be falling.

What should you do?

Nothing, most likely. If you've been living in your home more than three years, you're still sitting in the catbird seat. Even if it has dropped in price, it's still worth more than you paid for it. Should you have sold last year? Hindsight is always 20/20.

Unless you're planning on selling, does it matter what prices are? Until it's time to rent the U-Haul and pack up the house, I wouldn't worry too much about it.

If you're planning on living in the same location for several years, buying instead of renting is still a good idea. Generally, you can claim your mortgage interest and property taxes as itemized deductions. In addition, on the sale of a primary residence, a married couple can exclude from taxes gains of up to $500,000 ($250,000 for single owners).

Two things get homeowners into trouble; the first is using your home as an ATM. Banks eagerly promote home equity loans and lines of credit, but don't fall for their siren songs. Your home is not a piggy bank.

The other major pitfall? Using an interest-only loan to buy more home than you can afford. Since "real estate always goes up," why bother with a mundane thing like building equity in a home? One of the beauties of homeownership is that it allows you to build equity without the drag of taxes. Either of these small-f foolish choices negates that advantage.

Prudent use of consumer debt to buy a home is never a bad idea. Besides, you'll be doing your part to bolster the sagging homebuilding stocks.

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Fool contributor Buz Livingston, CFP, likes to kayak in the Gulf of Mexico and believes most investors will benefit from professional advice. He does not own any stocks mentioned, but he and his wife own a home in Florida.