5/10 pl Deep Stacks flopped low straight

Stack sizes are effectively 3k. Hero and villian are both winning today, and have played MANY pots together (I'd estimate well over 200 hours together). Villian is fairly loose and aggressive (but only raises hands big cards preflop, KJ+ 99+), will make big bluffs, but lately has cooled down a bit the last few sessions we've played.

He raises the pot. There's a caller. I call.

$140 in pot. Flop comes 7h 8h 9c.

I bet out $120. He thinks for a bit, goes to raise. Then calls. The other guy in the pot (a loose, fairly good, slightly winning player) says 'you were gonna raise it ey??? and thinks a bit, then calls.

$500 in pot. Pot rags queen, I bet $500 into him again. He thinks for a while, and [img]/images/graemlins/blush.gif[/img] folds. Other player folds.

Ok, so I got a bit scared here not wanting to see half the deck without making him pay, I bet into him on the flop, figuring he'd normally raise me with an overpair, i could call, then CR him for a lot when the turn ragged. But he folded, told me he sweared on his children that he had kings, I believe him since we've played a lot of hours together and I know him fairly well.

How bad is the line against an aggressive player? I think I bet too much and took the action away from him, but I didn't want to shut him out straight away with a check raise... Maybe a weak lead would have worked better? As it stands, I feel like I missed a chance to stack his overpair if I played it perfectly... (he'll often commit with one pair).