(MONEY Magazine) – Ed Yardeni was among the first Wall Street strategists to argue after the 2000 stock market crash that real estate would be the next big thing. Low interest rates, a weak dollar, tax cuts, immigration and demographics all pointed to a real estate boom, Yardeni said—and this was at a time when most of his peers thought Elm Street prices would tank along with those on Wall Street. But now, Yardeni warns, the ground is shifting, and he wonders how many American home-owners are truly prepared for the boom's end. Yardeni, who recently became chief investment strategist of Oak Associates after stints at Prudential Securities and Deutsche Bank, is often early and sometimes wrong in spotting trends: He foresaw the mutual fund craze of the 1990s, but he also forecast a worldwide Y2K computer disaster that never happened. Even so, he's always worth listening to, especially if you own what he's commenting on.

Q. Where are we in this real estate cycle?

A. Real estate values have risen faster than incomes the past three years, largely because the Fed dramatically lowered interest rates. Now, as rates are going up, people are rushing in, trying to buy before rates go much higher. But that's pushing prices up even faster, and that's creating another inducement—to rush in before prices go higher. That's typical for the last stage of any bubble: Speculators and ordinary people jump in, not so much because they must have that asset in their portfolio but because they feel they have to jump in. However, if you sit back and do the math, you'll see that buying now doesn't make sense unless you believe home prices will continue to soar.

Q. But isn't it possible that we could get rising incomes, rising growth, rising rates and rising home prices, extending the life of this bubble, as you describe it?

A. Oh, the last leg of a bubble doesn't mean it's over. Last legs can last a year, two years, three years. But we are now in the phase where we are really stretching the financing of these home values to the point that if we do get into a period where incomes don't rise, where people are losing jobs—in other words, if we get into the next recession—it could very well exacerbate that recession.

Q. Uh, when is this "next" recession?

A. I think it's two or three years away. In the interim, home prices could continue to go up. In many ways, we still have the 9/11 effect, where people feel like the home is the most secure asset of all, an asset that gives you physical and psychic value every day.

Q. The housing bulls say this boom is part of a real trend that's based on the baby boomers' relatively late family formation and rising immigration rates. That it's healthy, not unhealthy.

A. There's absolutely no doubt that there are some very healthy, powerful, secular trends driving this. Immigrants were and still are aspirational, and having prospered rapidly they wanted to buy homes. We also have 100 million Americans who are 25 years or younger, and this is bigger than the original baby boom. And all those people are going to need homes. It's just that we have taken all this potential demand for real estate and basically unleashed it with extremely low interest rates. That is driving up prices, and higher prices, in turn, are bringing in even more speculative demand for housing. The fundamental demand for housing is very strong, but it needs to be moderated.

Q. What particular area of real estate worries you most?

A. Home-equity loans. They now exceed $750 billion. And the total loan commitment, or the max that people can still borrow, is probably double that because not everybody takes out everything from their home-equity lines of credit right away. What concerns me is that these potentially are financial weapons of mass destruction, to take a phrase from Warren Buffett.

Q. Yes, but I'll talk of my own experience. Rather than buying a new home, I decided to remodel my own, and I tapped and used all of my home-equity line of credit. In fact, my entire neighborhood's doing the same thing.

A. That's okay. If you're taking your home-equity credit and putting it back into your house and making the house more valuable, that's a good thing to do. You live more comfortably and your asset is worth more. But, unfortunately, there are no real data to tell us the extent to which home-equity loans are being used simply to increase the value of homes vs. to pay for college educations vs. to pay for SUVs vs. to pay for filling up those SUVs. You never really know the extent to which these things have been done in an excessive way until the bubble bursts.

Q. What about homeowners who have taken on maybe a little more mortgage debt than they really ought to have signed on to? What do they do?

A. Individuals ought to change the way they think about mortgage credit and home-equity loans. They have to think about paying down these loans, not taking out more of these loans. They have to think about worst-case scenarios: What happens if they lose their jobs? What happens if they lose one out of two incomes?

Q. And what are you recommending now to investors? All kinds of home stocks have performed well during this real estate boom.

A. I still like the home builders, which I've been recommending for around three years now. These stocks are still trading at multiples of under 10. Their forward earnings just continue to soar. They continue to gain market share, and they've cornered a lot of scarce land in some valuable marketplaces. I think the home builders are going to continue to show double-digit increases in earnings, and I think they're okay until the bubble bursts. And that could be as far off as 2008.