For anyone who drools over home-makeover shows, visiting the KB Home studio in Las Vegas is like a child's trip to Disney World. The showroom is filled with granite counters, oak cabinetry, sleek appliances and young couples tricking out their dream home. This is where customers of KB, the nation's largest builder of entry-level homes, choose accessories, from superinsulated windows to built-in surround-sound speakers. The average buyer spends $25,000 on these options, but it seems painless thanks to the handy chart that studio director Miguel Hutton hands out at the door. The chart, with a sliding arrow pointing to the current mortgage rate, shows that $25,000 in upgrades will add just $145 to a monthly mortgage payment, or, as Hutton explains it, just "$35 a paycheck."

Such is the power of low interest rates, which have helped fuel the biggest run-up in home values in a generation. For years experts have debated whether skyrocketing home prices--up 9 percent nationally in the last year--have gotten out of hand. By now you're probably familiar with the arguments. Bears say Americans' disenchantment with the stock market has made them irrationally exuberant for real estate, leading to speculation. They see rents falling, and too many people taking out adjustable-rate mortgages to stretch to buy a home. Housing bulls note that nationwide home prices have never fallen year-over-year, that demand for housing exceeds supply in many markets and that low rates have helped keep homes affordable.

What's new in this debate is that interest rates have begun to climb: while 30-year mortgages are still below 6 percent, economists predict they'll be at 6.25 by December and higher next year. Some say they're hearing the housing bubble's first hiss of a leak. Home sales dipped in July; in some markets, real-estate agents report rising inventory and slower sales. In this environment, KB Home, which built 27,331 homes last year, is a canary in the coal mine. The reason: its mostly first-time buyers are thought to be especially sensitive to rising rates, since they typically have small down payments and stretch to buy as much house as they can. "First-time buyers are going to evaporate first," says John Talbott, author of "The Coming Crash in the Housing Market." "When interest rates increase, they're not going to qualify [for a mortgage], and when they disappear the impact will be felt throughout the market."

Back at KB headquarters in Los Angeles, Bruce Karatz has spent many hours disputing that logic. "I never stop trying to think what better way there would be to explain [it]," says Karatz, KB's chairman. While interest rates clearly affect home sales, he argues that jobs, income growth and demographics are far more important. "Events drive home buying, not interest rates," he says. Even if mortgage rates soared to 9 percent, people would continue having babies and moving to take new jobs--life changes that compel them to buy regardless of where rates are. That's especially true for first-time buyers, he says. Young families look at home buying as a rite of passage that's as much emotional as financial, so they'll forge ahead even if rates are high. If anyone is likely to be deterred by higher rates, he says, it's trade-up buyers, who can more easily hold off buying.

Las Vegas newlyweds Shane and Mai Boxrz agree with his view. Eight weeks ago they had their first child, Kaden. They now live in a two-bedroom town house with stuff stacked everywhere. So they recently ordered a home in a KB development a few minutes from the Strip. For $250,000, they'll get a Spanish Colonial with three bedrooms and a loft. What happens if rates rise before they close next March? "We need a larger home--that's just the fact of the matter," says Shane, an emergency medical technician. "I can't determine what goes on with interest rates." Somehow, they'll make the numbers work.

Families around Las Vegas appear to be making the same calculation. Prices here increased 50 percent last year, and at the 48 KB subdivisions currently rising from the desert, prospective buyers continue to sign on to waiting lists. Still, with Vegas starter homes now well over $200,000, KB is hedging its bets by building its first local condo community. With more units per acre, prices start at just $177,900; that could appeal to buyers squeezed by rising rates.

At every KB community, workers don't start hammering until the company's got a buyer and a deposit. That's a big change from the early 1990s, when companies "spec built" homes, then looked for buyers. When the market turned south, empty homes would languish, dragging down the values of existing homes. Today large home builders like KB, Pulte and Centex build nearly one in every four new U.S. homes, and their build-to-order methods limit inventory and reduce risk, making housing more stable.

Not everyone buys these arguments. Just look at the stock market. Home-building stocks like KB trade at extremely low price-to-earnings multiples because investors worry they'll get dinged by rising rates. Karatz, however, insists that the obsession with interest rates represents "a clear misunderstanding of what happens when markets turn down." Other housing bulls say that even if conditions soften, they'll do so mildly. "There is no national price bubble--never has been, never will be," says David Lereah, chief economist for the National Association of Realtors. "We can't sustain record-setting prices forever, but the level we'll come down to is still a healthy level." As the stock and bond markets idle, homeowners can only hope the value of the walls around them keeps going through the roof.