Q: After two years of saving money, we finally have enough cash to make a down payment on a home. But all this talk about the “housing bubble” makes us think that it would be stupid to buy a house now, because everyone seems to think that prices are going to drop. What should we do?

A: I understand your concerns about buying a home now, when so many self-proclaimed experts say that home prices are going to plummet. But many of those same naysayers started beating the “housing bubble” drum way back in 2000. Nationwide sales have since set five consecutive annual records, and prices in many parts of the country have surged more than 50 percent.

The housing market should indeed slow down in 2006, but it certainly won’t collapse: Prices in most areas will continue rising, but not as quickly as they have in the past several years. I’m using this week’s column to provide my annual housing forecast for the year ahead.

Q: How do you think home sales will fare next year?

A: Total U.S. sales in 2006 should finally ease a bit – maybe 5 percent or so – from their record-breaking, five-year run. The National Association of Realtors is calling for a more modest 3.5 percent dip.

The slight sales downturn should result from a couple of factors. First, the market simply needs to “catch its breath”: Babe Ruth couldn’t set records year after year, and home sales can’t either.

Sales also will be held in check by rising interest rates. Average rates on 30-year fixed mortgages have slowly climbed in the past few months, and recently stood at about 6 percent. Look for them to rise about one more percentage point by the end of 2006.

Q: If home sales fall, won’t prices drop too?

A: Not necessarily. Home values are certainly affected by an area’s overall sales rate, but lots of other things also help to push prices higher or lower. Three of the most important factors are construction rates, the cost of new building materials, and changes in the economy.

The recent slowdown in new construction across most of America will likely continue in 2006, which, in turn, should help buoy prices by keeping a balance between the supply of new homes and demand. Meantime, post-hurricane rebuilding efforts in the South will keep fueling the nationwide run-up in the cost of building materials and labor rates: That, too, will help prevent prices for both new and older homes alike from collapsing.

Perhaps most importantly, chances of a market-busting recession next year are slim. Add all this together, and the price of a typical U.S. home in 2006 should increase about 5 percent or 6 percent – roughly half of this year’s nationwide increase, but still about twice the expected overall inflation rate of around 3 percent.

Q: If your forecast of a one-point rise in mortgage rates proves correct, won’t a lot of buyers find it impossible to purchase a house because their monthly payments would be too high?

A: Should fixed rates rise from about 6 percent today to 7 percent next year, the monthly cost of a new $200,000, 30-year mortgage would increase by a relatively modest $130. That would certainly be enough to knock a handful of prospective buyers out of the housing market, but not nearly enough to send sales and prices into a tailspin.

Q: Where did prices rise the fastest in 2005?

A: Final figures won’t be available for several weeks, but it’s clear that prices in every single region of the nation have risen sharply in the past 12 months.

Values in the West have surged an average of about 19 percent this year, according to a recent report by the National Association of Realtors. The Greater Phoenix area of Arizona performed better than any other metro area in the nation, with the price of a typical home up a staggering 55 percent from 2004. Prices in Oregon’s Eugene-Springfield market climbed 26 percent, while values in Los Angeles County and nearby Bakersfield, Calif., have been running about 21 percent ahead of last year.

The average price of a home in the Northeast rose 13 percent, according to the realty group’s researchers. The Glenn Falls, N.Y., area led the pack with a 25 percent gain. Prices in Greater Philadelphia (which includes parts of Pennsylvania, New Jersey, Delaware and Maryland) jumped 19 percent.

Home values also rose an average of 13 percent in the Midwest in the past year. Two key Illinois markets – Rockford and the Bloomington-Normal area – experienced an even stronger 14 percent gain. Prices in the Waterloo-Cedar Falls area of Iowa leapt almost 15 percent.

Values in the South climbed nearly 8 percent, and the figure would have been even higher if sales in many areas had not temporarily ground to a halt in the wake of Katrina and the other hurricanes.

Prices in the massive Orlando, Fla., market surged an average of 45 percent – the second-best gain in the entire nation – while values in the Cape Coral-Fort Myers area shot up 43 percent.

Several other Florida markets notched price gains of more than 30 percent, and the state as a whole saw an average increase of about 28 percent.

Look for every region in the nation to enjoy more price gains next year-just don’t expect them to be as spectacular as they were in 2005.

– David W. Myers is a 20-year veteran of the newspaper and magazine business, having previously covered real estate for the Los Angeles Times and Investor’s Business Daily.