THE WORDS "HOUSING" AND "BUBBLE"

are as natural a combination these days as peanut butter and jelly. Every news outlet, it seems, is eager to call the top of the most robust real estate market in memory.

There's no arguing with the data. The Center for Housing Policy, a Washington, D.C., research firm, released a study Tuesday showing that the median price of a home in the U.S. rose 20% during the past year and a half. Mind you, that's the median price across the entire nation from scorching Las Vegas (up 34%) to shivering Syracuse (down 2%).

While economists agree that prices can't keep climbing at such a pace, what they can't agree on is when the appreciation will start to slow or reverse itself.

According to David Lereah, chief economist at the National Association of Realtors, a trade group in Washington, D.C., a downshift is near. Although sales of new and existing homes should set records in 2005, demand should soon fall back to more modest levels, he says. The culprit: rising mortgage rates.

Cheap money has fueled the housing market for the past four years, says Lereah, but there are some fresh signs of a slowdown. According to a survey by the Mortgage Bankers Association, a trade group in Washington, D.C., mortgage applications were down almost 1% last week to their lowest point since late May. The average rate for a fixed 30-year mortgage rose to 5.91% last week, from 5.83% the previous week. That was the highest level since early April, when 30-year mortgages hit 5.95%.

But a housing pullback doesn't mean the market will crash, says Lereah. In fact, he says that while the outsize gains of recent years won't continue, prices will continue to increase at a still-healthy clip during the next few years.

"Real estate should still be extremely competitive [in terms of] return on investment," says Lereah, a longtime housing bull who, as an economist for the NAR, could be viewed as a not-entirely-dispassionate observer. "You don't need a 20% price appreciation to do well. You could still have price appreciation of 10% and beat most stocks. I think for the remaining years of this decade real estate will still be a good investment."

SmartMoney.com chatted with Lereah recently to get his views on home-price appreciation, the direction of mortgage rates, the investment potential of real estate and the dangers of interest-only loans.

SmartMoney.com: This week you said that we might be near a peak in the real-estate market. Should people be worried about the price of their homes?

David Lereah: I've been saying that for two, three years now: That we're finally at a peak for home sales. And we continue to be wrong. We do think right now we may be at a peak, and that home sales should come down a bit as mortgage rates continue to rise.

SM: Is the rise in mortgage rates a key trend now?

DL: They've been rising for the last month and half now. Activity is very brisk. There's a lot of interest. But if mortgage rates continue to rise, if the Fed continues to raise the federal-funds rate, it's got to slow demand a little bit. I'm not talking about a big slowdown, but I think we are looking at a peak.

SM: Do you think the real-estate market will still be able to provide a sound investment?

DL: Real estate is still a great investment opportunity for households. Price appreciation will continue. It may not be at 20%. It may be at 10% to 15%, or may even go down to 5%. The returns are still going to be good, but not as great as they have been. Real estate should still be extremely competitive [in terms of] return on investment. You don't need a 20% price appreciation to do well. You could still have price appreciation of 10% and beat most stocks. I think for the remaining years of this decade real estate will still be a good investment.

I think real estate is still a very attractive investment to buy or to live in. I think price appreciation will continue. I don't think there will be a price-appreciation pop. It's not going to be nationwide. The fundamentals are there. The demography trends and population trends are there. It's a once-in-a-generation opportunity.

SM: Do you envision certain regions of the country, like Florida, seeing a slowdown anytime soon?

DL: Certainly, Florida is a beneficiary of this generation trend. Boomers are retiring and they're moving to Florida. It has a great demand that it hasn't seen in 20 to 30 years. That's generating great returns in Florida. Arizona, Nevada and some of the coastal areas in the Carolinas are all beneficiaries of boomers aging.

SM: I'm assuming you don't believe in the existence of a housing bubble.

DL: No, I don't think there is one. You may see some air come out of some of those balloons. It might go from 20% appreciation to 5%. Housing [price appreciation], historically, is between 3% and 6% [annually] somewhere in that range. So if you can do better than 6%, you're doing great. Even 5% is still very good.

SM: What if people interested in investing in real estate come to expect 20%-plus price appreciation on their homes, and won't be willing to settle for just 5%?

DL: I think that we'll probably knock out a certain percentage of investors. But the ones who remain will do very well. Remember, a 5% price appreciation gives you a lot bigger return than 5% because you're buying real estate on margin. You're giving a down payment. Say you put down $10,000 on a $100,000 house. If it increases by 10%, you get $10,000. That's a 100% return.

SM: If a peak, in your opinion, is close at hand, should investors stay away from real estate?

DL: There's still momentum. It's still a very healthy market with a lot of demand. It looks like if interest rates continue to go up maybe we've hit a peak in terms of home sales. We do expect the Fed to continue to raise rates a quarter percent each time. Each time they do that, mortgage rates will get a little bit higher. But again we're still going to be at healthy levels.

SM: How risky are the interest-only mortgages being pushed aggressively these days?

DL: [Interest-only loans] are making real-estate markets a little vulnerable, a little fragile. If interest rates rise, people who have interest-only loans will be in trouble. Their payments will get bigger because they're just paying interest. They may be more inclined to sell when rates go up. So there might be risk in the market in general.